ARKANSAS PUBLIC EMPLOYEES’ RETIREMENT SYSTEM 124 WEST CAPITOL AVENUE LITTLE ROCK, ARKANSAS 72201 SPECIAL BOARD MEETING TUESDAY, JUNE 23, 2020 at 9:00 A.M. ** MEETING TO BE CONDUCTED BY VIDEO CONFERENCE ** Contact [email protected]for video conference details. AGENDA 1. Call to Order 2. Notification of Meeting to News Media Pursuant to Act 93 of 1967 (AR Code 25-19-101) – Freedom of Information Act 3. Recognition of the Presence of a Quorum 4. Action Item: Approval of the Minutes from May 20, 2020 (page 2). 5. Comments from stakeholders regarding proposals being considered by the Board a. Chris Villines, Association of Arkansas Counties (page 11). b. Mark Hayes, Arkansas Municipal League (page 14). c. John Bridges, Arkansas State Employees Association (page 16). 6. Presentation of Actuarial Information to Continue Preparations for the 2021 Legislative Session - Presented by Mita D. Drazilov, David L. Hoffman, and Heidi G. Barry of GRS (page 18). 7. Discussion 8. Next Regular Meeting – August 19, 2020 at 9:00 a.m. 9. Adjournment 1
Transcript
ARKANSAS PUBLIC EMPLOYEES’ RETIREMENT SYSTEM 124 WEST CAPITOL AVENUE
LITTLE ROCK, ARKANSAS 72201
SPECIAL BOARD MEETING TUESDAY, JUNE 23, 2020 at 9:00 A.M.
** MEETING TO BE CONDUCTED BY VIDEO CONFERENCE ** Contact [email protected] for video conference details.
AGENDA
1. Call to Order
2. Notification of Meeting to News Media Pursuant to Act 93 of 1967 (AR Code 25-19-101) –Freedom of Information Act
3. Recognition of the Presence of a Quorum
4. Action Item: Approval of the Minutes from May 20, 2020 (page 2).
5. Comments from stakeholders regarding proposals being considered by the Boarda. Chris Villines, Association of Arkansas Counties (page 11).b. Mark Hayes, Arkansas Municipal League (page 14).c. John Bridges, Arkansas State Employees Association (page 16).
6. Presentation of Actuarial Information to Continue Preparations for the 2021 Legislative Session - Presented by Mita D. Drazilov, David L. Hoffman, and Heidi G. Barry of GRS (page 18).
7. Discussion
8. Next Regular Meeting – August 19, 2020 at 9:00 a.m.
MINUTES OF THE QUARTERLY MEETING OF THE BOARD OF TRUSTEES ARKANSAS PUBLIC EMPLOYEES’ RETIREMENT SYSTEM
MAY 20, 2020
A regular meeting of the Board of Trustees of the Arkansas Public Employees’ Retirement System was held on Wednesday, May 20, 2020 at 9:00 a.m., via ZOOM remote conferencing due to the COVID-19 crisis. Ms. Candace Franks presided. QUORUM PRESENT: Ms. Candace Franks recognized the presence of a quorum. BOARD MEMBERS PRESENT: Ms. Candace Franks (State Employee Member), Chair, Little Rock, AR Mr. Larry Walther (Ex-Officio Member), Vice Chair, Department of Finance and Admin Mr. David Hudson (County Employee), Fort Smith, AR Mr. Gary Carnahan (Other, Non-State Employee), Hot Springs, AR Mr. Joe Hurst, (City Employee), Van Buren, AR Mr. Dale Douthit, (State Employee), Russellville, AR Mr. Daryl Bassett (State Employee Member), Sherwood, AR Mr. Jason Brady, State Treasurer’s Office (proxy) Hon. Andrea Lea (Ex-Officio Member), State Auditor Mr. Duncan Baird (Executive Director), APERS Executive Director BOARD MEMBERS ABSENT: Hon. Dennis Milligan, (Ex-Officio Member), State Treasurer VISITORS PRESENT: Mr. David Hoffman, GRS Mr. Mita Drazilov, GRS Ms. Heidi Barry, GRS Ms. Brianne Weymouth, Callan LLC Mr. John Jackson, Callan LLC Mr. John Bridges, ASEA Ms. Nancy Priest, ASEA Mr. Charles Leslie, ASEA Ms. Shauna Carpenter, ASEA Ms. Judy Carter, ASEA Mr. Jack Critcher, Arkansas Municipal League Mr. Chris Villines, Association of Arkansas Counties Mr. John Shelnutt, Department of Finance and Admin. Mr. Paul Louthian, Department of Finance and Admin. Mr. Daniel Faulkner, Attorney General’s Office Ms. Barbara Brown, Legislative Analyst Senator Bill Sample, General Assembly Mr. Mike Knapp, Bureau of Legislative Audit Mr. Austin Grinder, Mullenix & Associates Mr. Clint Rhoden, ATRS Director
2
Mr. Heinz Braun, ADEQ Mr. Mike Wickline, Arkansas Democrat-Gazette Mr. Michael Bowman, The Capital Group Ms. Erika Gee, Wright, Lindsey & Jennings LLP Ms. Betti Rippentrop, APERS Member Ms. Karrie Goodnight, APERS Member Ms. Donna Bedwell, APERS Member Ms. Maria Zamarripa, APERS Member Ms. Judy Houser, APERS Member Ms. Jacqueline Greene, APERS Member Ms. Julie Kardas APERS Member Ms. Marcia Moore, APERS Member Ms. Selena Corter, APERS Member Ms. Sobrena Roland, APERS Member Ms. Brenda Jackson, APERS Member Ms. Patti Gilliland, APERS Member Ms. Brenda Jackson, APERS Member Ms. Lottie Adams, APERS Member Mr. Christopher Anderss, APERS Member Ms. Melissa Slaughter, APERS Member Mr. Ralph Mills, APERS Member Ms. Mary McGehee, APERS Member Ms. Jennifer Shipley, APERS Member Ms. Reta Dean APERS Member Ms. Pam Wileman APERS Member Ms. Yvonne Bowman, APERS Member Ms. Deiona McKnight, APERS Member Mr. Rocky Lambert, APERS Member Ms. Vivian Cook, APERS Member Mr. Keith Ingram, APERS Member Ms. Rebekah Griffin, APERS Member Ms. Sharon Lewis, APERS Member Ms. Patty Florczak, APERS Member Ms. Wendy Spakes, APERS Member Mr. Nicholas Poole, APERS Member Ms. Mary Runnels, APERS Member Ms. Sheila Weddington, APERS Member Mr. Nathan Marlin, APERS Member Ms. Kim Williams, APERS Member Ms. Daina Witt, APERS Member Ms. Michele Pruss, APERS Member Mr. Corlett Warmath, APERS Member Mr. Rodney Corbin, APERS Member Ms. Sharon G. Laster, Retiree Mr. Edwin Waddell, Retiree Mr. Michael Smith, Retiree Ms. RoseAnne Smith, Retiree
3
Ms. Mary Grace Smith, Retiree Ms. Becky Walker, Retiree Mr. Eddie Jones, Retiree Ms. Evelyn Wainwright, Retiree Ms. Mary Grace Smith, Retiree Mr. John Hubbard Mr. Adam Johnson 4 Unidentified Call-in Members
STAFF PRESENT: Mr. Carlos Borromeo, APERS Chief Investment Officer Ms. Usha Doolabh, APERS Investments Manager Ms. Laura Gilson, APERS Chief Legal Counsel Ms. Abbi Bruno, APERS Director of Operations Mr. Phillip Norton, APERS Director of IT Mr. Jon Aucoin, APERS Retirement Section Manager Ms. Jennifer Taylor, APERS Retirement Section Manager Mr. Allison Woods, APERS Director of Benefits Mr. John Owens, APERS Internal Auditor Mr. Jason Willet, APERS Chief Financial Officer Mr. Craig Blackard, APERS Accounting Supervisor Ms. Nina Gettinger, APERS Retirement Coordinator Ms. Jacobia Twiggs, APERS Retirement Section Manager Ms. Linda McGrath, APERS Administrative Specialist
NEWS MEDIA NOTIFIED: An e-mail with notification of the Arkansas Public Employees’ Retirement System Board meeting was sent to the Arkansas Democrat-Gazette, the Associated Press, Television Station KLRT- FOX16, Radio Station KARN, and Radio Station KAAY. This notification is pursuant to A.C.A 25-19-101 (Act 93 of 1967) as amended-The Freedom of Information Act.
WELCOME: Mr. Baird welcomed everyone to the first APERS Quarterly Meeting to be held remotely via ZOOM. He noted that besides all the Trustees, Staff and presenters, there were over forty attendees including the Press. Mr. Baird also explained that each the APERS Trustees had received a comment letter from ASEA (Arkansas State Employees Association) earlier in the week, regarding Item #8 in the agenda: Actuarial Presentation and Discussion of Preparations for the 2021 Legislative Session and hoped everyone had read it prior to the meeting.
MINUTES: Prior to the Board meeting, a copy of the Minutes from the April 30, 2020 meeting was e-mailed to each APERS Board member for review. Mr. Douthit noted that he had requested a study on the effects of a 6-year Final Average Salary, not 5-year.
Mr. Brady motioned to accept the April Minutes as amended. Mr. Walther seconded. Motion passed and the Minutes were approved.
4
INVESTMENTS QUARTERLY INVESTMENT REPORT FOR THE PERIOD ENDING MARCH 31, 2020- Presented by Ms. Brianne Weymouth and Mr. John Jackson of Callan LLC Mr. Jackson reviewed the global economic environment in the wake of the outbreak of COVID-19 noting that the virus had caused global economies to grind to a halt. “Social distancing” shut down business world-wide and led to a dramatic surge in unemployment. Second quarter GDP decline is estimated to be negative 20-30% (annualized), something that has not been seen since the Great Depression. There has been a 95% decline in airline passengers as of April 7, 2020 and oil prices fell over 65% in the first quarter as a result of both demand and supply shocks. Governments have stepped in with unprecedented levels of monetary and fiscal stimulus. Currently, it is felt that true recovery can only be realized once a vaccine is introduced.
Ms. Weymouth described the portfolio’s performance through end of March, noting the fund was slightly underweight in International Equity due to market movements; no rebalancing was necessary. Ms. Weymouth cautioned on making hasty decisions on rebalancing the portfolio in this highly volatile market.
The APERS portfolio was down 16% for the quarter, dropping from almost $9.6 billion on December 31, 2019 to just over $8 billion on March 31, 2020. While most managers had very disappointing returns, for the most part their returns were in-line with their respective benchmarks.
Ms. Weymouth noted that a Domestic Equity manager, LSV Asset Management, had been particularly challenged over the last 12 months. LSV is a Small-Cap, Value manager which had been hit hard from both categories over the recent time period. She noted that LSV was a newer manager to the APERS portfolio and Callan felt they should be given more time. Ms. Weymouth offered to review their performance again at the next meeting.
ADMINISTRATIVE SUMMARY OF RETIREES FOR FEBRUARY, MARCH and APRIL 2020: Mr. Baird read from the report, noting that APERS had 213 members who retired in February, 203 in March and 164 retirees in April. This brought the total number of retirees and beneficiaries receiving monthly checks from APERS to 36,286. Currently, about 2/3 of the retirees are Non-Contributory while the remaining 1/3 are Contributory members.
FINANCIAL STATEMENTS FOR THE QUARTER ENDING MARCH 31, 2020: Employer Contributions are up over $5 million from the same time period a year ago to $228 million, while Member contributions totaled $54 million over that period. There has been about a 6% increase in payouts to retirees since a year ago. Looking forward, APERS expects to pay out over $600 million in benefit payments for FY 2020.
Mr. Brady asked for detailed numbers on APERS’ rate of return through March 31 and the updated number for the first 45 days of this quarter. Mr. Baird answered that at the end of March the portfolio showed a (10.65%) rate of return. This number had improved slightly as of May 18th, showing APERS portfolio holding a value of $8.635 Billion (unaudited). Mr. Baird noted that for the GRS Presentation later in the meeting, the Actuaries had assumed a (5.0%) rate of return for FY 2020.
5
MEDICAL REVIEW BOARD RESULTS: The Medical Review Board met at 9:00 a.m. on Wednesday, May 12, 2020 in the APERS Library to discuss two (2) cases: Member XXX3926 and Member XXX9571.
• After review and discussion, the Medical Review Board recommended denial of disabilityretirement to Member XXX3926 at this time, pending additional information.
• After review and discussion, the Medical Review Board recommended denial of disabilityretirement to Member XXX9571 at this time, pending additional information.
No action was needed by the APERS Board.
REVIEW OF FY 2019 LEGISLATIVE AUDIT REPORT Mr. Baird explained that this was a required annual process. The report shall be presented to the Trustees for approval at the first meeting held after the report is finalized. Each board member had been sent a copy of the audit directly, prior to this meeting. For the record, that Legislative Audit had no findings and no corrections for Fiscal Year 2019. The previous audit had noted a couple small issues, but Staff (under Interim Director Wills) had worked to resolve those issues. Mr. Baird felt the progress they had made was reflected in the current Legislative Audit. Mr. Bassett commended Mr. Baird and the APERS Staff for the excellent audit report.
Mr. Bassett motioned to approve the Legislative Audit Report. He was seconded by Mr. Carnahan and the motion carried.
Mr. Baird also noted that the Controlled Self-Assessment had been submitted in March 2020.
DIRECTOR’S BIENNIAL BUDGET REQUEST Mr. Baird detailed the Agency’s proposed budget for the next two years. He pointed out that there was no increase planned for appropriation levels and no increase in the number of agency positions. Mr. Walther asked if this represented a zero-budget increase and Mr. Baird stated that was correct. Ms. Lea asked how many of the 81 listed positions were filled. The Director responded that 69 positions were currently staffed. He was holding the positions open to allow the agency flexibility to adjust going forward.
Motion to approve the Director’s Biennial Budget as submitted by Mr. Walther and second by Mr. Hudson. The motion passed.
LEGAL Litigation Update – Ms. Laura Gilson, APERS General Counsel A litigation report was included in the board materials. Ms. Gilson apprised the Board that the recent Court Clerks’ case that was before the board (Veronica Young, et al.) was appealed to Pulaski County Circuit Count on March 27th. APERS filed the Administrative Record as required under the law, answered the complaint and moved to dismiss.
In Bolding v. APERS, a member appeal that was appealed to Pulaski Court Circuit Court, counsel for Bolding has requested a hearing on motions that have been filed. APERS filed a motion to dismiss based upon sovereign immunity.
6
Regarding two cases before the Arkansas Claims Commission, Clark v. State has been set for hearing before the Claims Commission in August, and Ellis Sloan v. APERS remains in the discovery phase.
Ms. Gilson reviewed the securities litigation cases where APERS has been named lead plaintiff. The Sea World case is settled, APERS does not yet know the amount it will receive in the settlement distribution.
The other pending U.S. case is Bristol Meyers, with Bernstein, Litowitz, Berger & Grossman serving as securities litigation counsel for APERS. APERS is still awaiting the Court’s decision. The final case is against TESCO (U.K.) involving Labaton Sucharow.
There was a short discussion between Mr. Walther, Mr. Baird, Ms. Gilson and Mr. Douthit regarding the article in the Arkansas Democrat Gazette about the legislative review of the agency’s securities monitoring firms, specifically Labaton Sucharow. Mr. Baird commented that APERS has historically engaged in a very limited amount of securities litigation as lead plaintiff and he expected the same to be true going forward. Board members voiced the desire to be apprised prior to any new litigation.
ACTUARIAL PRESENTATION & DISCUSSION OF PREPARATIONS FOR THE 2021 LEGISLATIVE SESSION — Presented by Mita D. Drazilov, David L. Hoffman, and Heidi G. Barry of GRS Mr. Drazilov opened by recapping the discussions of the February and April meetings. Based on those discussions, GRS would be presenting possible June 30, 2020 Actuarial Valuation results and projections based upon requested supplemental valuations at the last few meetings. Finally, there would be a discussion of the possible timelines for implementation and other considerations.
At the April meeting, the Board was presented with a preview of what the June 30, 2020 actuarial valuation might show based on various market rate of return scenarios. It was projected that the APERS’ UAAL of $2.39 Billion (as of June 30, 2019) could grow significantly under various scenarios due to the recent market downturn. Mr. Drazilov reviewed the Summary of Projections where the Board had previously discussed the tentative results of a (5%) Market Value Return for Fiscal Year 2020 and its effect on the UAAL and the APERS’ Funded Ratio over the next 15 years. He also showed how the Employer Contribution Rate would need to be increased, in order to keep within the suggested 30-year amortization period. He suggested that after the Board reviewed the supplemental valuations at this meeting, it was likely they might want to schedule another special meeting before reaching any final decisions.
In reviewing the previously requested supplemental valuations from the April 2020 meeting, it was noted they generally fell into the following categories:
• Member Contribution Rate changes• Cost of Living Allowance (COLA) changes• Final Average Compensation (FAC) changes• Vesting changes
The Board also discussed the effects of legislated changes on the various member groups: • Current retirees• Vested active members• Non-vested active members• New hires
7
Mr. Drazilov explained how GRS calculated the supplemental actuarial results hypothetically assuming the various benefit changes had been in effect as of the June 30, 2019 valuation. He reviewed several slides that detailed how various changes to the Member Contribution Rate, COLA, FAC, and Vesting could affect either the Amortization Period or Decrease the Employer Contribution Rate (but not both) and potential decrease the UAAL. The concept of “Quasi-vesting” was explained, under which the currently 5-year vesting period would not change, but until a member reaches 10-years of service, their benefit multiplier would be 1.6%. Upon obtaining 10-years of service, the regular multiplier would be retroactively applied to those first 10-years and as well as any additional service in the system.
Mr. Drazilov told the Trustees that for the purpose of the scenarios, they had assumed the changes went into effect on specific future dates. Mr. Baird clarified that GRS was not suggesting the board adopt those dates, but merely using them to show the framework under which these assumptions were made. Using several slides, Mr. Drazilov showed how raising the Member Contribution Rate to 6.0%, 6.5% and 7.0% (phased-in over various periods of years) could affect the UAAL, Funded Ratio, Amortization Period and projected Employer Contribution Rate.
The actuaries showed the various effects of changing the current 3% Compound COLA to a 3% Simple Interest COLA or a Compound COLA that would be the lesser of 3.0% or the increase in CPI each year. They showed charts that detailed the gradual increase in the Funded Ratio, as well as the decrease in the fund’s UAAL.
Mr. Brady asked Mr. Baird to explain to the Board what timeline they needed to be working on to have potential legislation ready in time for the 2021 session. He also asked if any of the proposed ideas would be difficult for Staff to implement and finally, what Mr. Baird’s thoughts were on the ASEA letter that all the board members had received prior to the meeting.
Mr. Baird said he had talked to the Chairs of the Legislative Joint Retirement Committee about the “Town Hall” meetings they have previously discussed holding later this year. He said that the Chairs had indicated that the meetings would take place across the state in August and September, well in advance of the October Legislative Budget Hearings. He opined that the meetings would probably be held remotely, due to the on-going COVID situation. Mr. Baird also stated that by holding them online, it might allow even greater attendance than last year’s round of state-wide meetings. He noted that the Board’s discussions were progressing and there was a possibility of scheduling another special meeting in June to narrow down their focus.
Regarding the implementation of any changes to the benefit structure, Staff was confident that new Pension Administration System could handle the technical implementation, He did suggest that the least complex implementation was any change in member contributions be applied to all active members, likewise changes in FAC to be applied to all active members. Vesting was a more complex issue due to termination refunds, switching employers and reciprocity, and Mr. Baird commented that applying this to New Hires only would be the most logical implementation. Regarding the COLA changes, the APERS tech staff was prepared to work to make any necessary changes.
At the previous Town Hall meetings, Mr. Baird noted there were several clear themes in the feedback he received from members. Retired members argued against changing the COLA, since they were already retired and could not readily adapt. Active members spoke up for changes that would reward long-term service and stated they would rather pay more in Employee Contributions to keep the level of benefits they currently enjoyed, rather than see them pared. Members also suggest that employers
8
should pay more. Reading through the ASEA letter that Mr. Brady had referred to earlier, Mr. Baird noted the desire on everyone’s part that APERS remain strong, but requested the Board give special attention to not cutting the benefits of current retirees and employees who have already made “life altering decisions”.
Towards that end, the ASEA letter gave some specific directions they urged the APERS Board to consider; increasing the contribution rate to 6% for new hires only. If the rate was raised on existing employees, it was suggested to increase it gradually over a 4-year period. Other suggestions were to increase the vesting period to 10-years for new hires and increase the FAC formula for everyone from three to five years. These suggestions paralleled the feedback Mr. Baird had received at the Town Hall meetings last year.
Ms. Lea commented that she agreed the Board needed to plan a June meeting and stressed that when one spoke of “Employer Contributions” they were, in fact, referring to the General Fund of the State of Arkansas; the same fund that pays the salaries of everyone. It was the actual budget that agencies lived with every year. She also noted that every board member is a member of APERS and “we are all eating from the same cookie.” Mr. Walther concurred with Ms. Lea’s statements and echoed the need for a June meeting. He reminded everyone that their actions affected not only State workers, but also many City and County workers, as well.
Mr. Carnahan suggest that for the June meeting, Trustees narrow down their focus to 2-4 specific changes so the Actuaries could come back in June and present them with the cumulative effect of various combinations of benefit changes. Mr. Hudson also noted the need for a June meeting to allow the APERS Trustees more time to absorb all the information they had been recently presented with from GRS and the ASEA letter. He agreed that the most sensitive area under consideration was the COLA and suggest that the changes be presented similar to how one would craft a resolution for the legislature to pass. Mr. Hudson also advocated for continuing retirement education for the Trustees, as well as the Board’s partners on the Joint Retirement Committee.
Mr. Bassett also agreed he needed more time to review all the information and agreed that a June meeting would be appropriate. Mr. Walther asked Mr. Baird what deadline(s) the Board faced on deciding which changes they wanted to address. Mr. Baird responded the he thought any decisions should be made before the Town Hall meetings began in August, so he was looking at a June, and possibly a July meeting. He asked that if any Trustees had questions about the potential benefit changes to please reach out to him for clarification.
Mr. Douthit agreed with Mr. Carnahan about the importance about seeing the cumulative numbers for various groups of legislative changes. He stated he wished to see the cumulative effect on the UAAL if the Board doubled the vesting period to 10 years flat (not quasi), doubled the FAS to 6 years, and also raised the Employee Contribution Rate to 6.5% (phased in over 2 years) the next time the Board met. Mr. Drazilov agree to produce this, and any other specific packages that the Trustees desired as long as they could be very specific on the provisions. Mr. Brady followed up with the statement that the Treasurer’s Office would very much like to find a guaranteed 3% investment for their funds, which is what the current COLA offered retirees. He requested Mr. Baird to ask Mr. Bridges at the State Employees Association, to address this issue when the APERS’ fund suffered a such catastrophic downturn, falling far short of their 7.15% assumed rate of return.
Mr. Hudson asked the Board members coordinate their packages of suggested legislative changes through Mr. Baird so he could be present them to GRS in the most efficient form. He also suggested
9
inviting not only ASEA, but also the Municipal League and the County Association to give a short (5-minute) presentation at the next meeting, with their suggestions on how to best strengthen and maintain the retirement system.
Ms. Franks summed up that everyone seemed to agree they needed another Special Board meeting in June to review the effect of certain packages, as well as absorb all the information they so recently received from GRS. She noted that a July meeting might not be out of the question, in order to finalize the proposals. Ms. Franks stated she would like to hear presentations from the other associations, as well. Ms. Lea and Mr. Bassett agreed with Ms. Franks on the probable need for a July meeting.
Motion by Mr. Bassett to extend an invitation to the ASEA and other similar organizations that might wish to appear before the board in June. Mr. Brady seconded and the motion passed. Ms. Franks asked Mr. Baird to reach out to those associations and get them on the June agenda. Mr. Baird felt they would be happy to be able to engage with the APERS Board in such a fashion.
Mr. Walther reminded the Board that in the end, it was the legislators who would carry the changes forward and not everything the APERS Board put forth might be written into a bill. He suggested that the Trustees give the legislators as much material to select from as possible in 2021.
OTHER BUSINESS There was no other business.
NEXT QUARTERLY BOARD MEETING: The next quarterly Board Meeting is scheduled for Wednesday, August 19, 2020 at 9:00 a.m. A special Board Meeting will be scheduled in June. Time and date to be announced later.
ADJOURNMENT: There being no further business, the meeting was adjourned.
__________________________________ ___________________________________ Ms. Candace Franks, Chair Mr. Duncan Baird, APERS Executive Director
10
11
12
13
June 22, 2020 Board of Trustees Arkansas Public Employees’ Retirement System 124 West Capitol Avenue Little Rock, AR 72201 RE: Municipal input on proposed legislative changes Chairwoman Franks and Honorable Trustees: Thank you for the opportunity to provide input from the Arkansas Municipal League (AML or League) regarding the various potential 2021 legislative proposals the Board of the Arkansas Public Employee Retirement System (APERS) has been discussing over the past several weeks. The League has been in existence since 1934 and serves as the collective voice of the 500 cities and towns in Arkansas. Those cities and towns constitute over 64% percent of the population of the state of Arkansas. The League provides cities and towns with a variety of services and programs designed to save taxpayer dollars and enhance municipal services such as public safety, street construction and maintenance, water and waste water and parks. I’ve consulted with Chris Villines, my counterpart at the Association of Arkansas Counties (AAC), regarding the legislative concepts being discussed by APERS. In large part I believe the League’s Executive Committee would agree with the AAC board. Unfortunately, the League’s Executive Committee will not meet until later this summer. At that poin,t they’ll be able to more thoroughly discuss the proposals. I have however, had an opportunity to visit with several League officers and am confident that the information I share with you is as accurate as can be given the current legislative discussions. The League applauds the fiduciary concerns of the APERS board regarding the overall financial health of the system and looks forward to helping solve issues with long term solutions. The financial and actuarial health of APERS is of utmost concern to city and town officials. Those officials and employees routinely work for comparatively low wages given the tasks they tackle daily but do so knowing that they will be able to rely on a stable retirement with benefits as promised upon vesting. To provide concise information and not waste the Board’s time I’ve summarized various issues in bullet form below:
• For those retired, on the “DROP,” or vested any change in promised benefits should be looked at very carefully. The likelihood such a change would withstand legal scrutiny is minimal and likely extremely expensive for the system. The property rights involved in such benefits have routinely been found sacrosanct. Thus, any changes to the benefit
14
structure, save the COLA. should be focused on new hires and those that have not yet vested.
• COLA changes will likely be met with strong opposition. It is one of the benefits that those vested or retired have been promised and relied on. Moreover, new hires typically are willing to forgo higher paying jobs for the security of a pension with a COLA.
• Moving the vesting period from five to ten years seems to be generally liked by those municipal officials I’ve been able to speak with. In fact, such a change for those not yet vested and for new hires may provide a solid long-term solution to several municipal issues as well as financially bolstering the system. Of course, a specific proposal would need to be in place before the Executive Committee could vote.
• Moving the final average compensation from three-years to five (and perhaps 6) was also generally positively received provided it was applicable only to those not yet vested and new hires. Concern was voiced regarding those who are vested and who’ve relied on the three-year period thus any changes to this benefit would have to be vetted once there is a concrete proposal.
• Contribution Rates. There is no interest from municipalities to raise employer contribution rates particularly in the middle of the pandemic. Employee contributions is another matter. If the Board seeks a full seven percent from the current five percent employees, at a minimum, would need that change to be implemented over time. As suggested by the AAC some sort of sliding scale would be necessary to ensure public employees do not suffer any such change in one fell swoop. Again, when a specific proposal is suggested by the Board the Executive Committee will be ready to take it up.
The town hall meetings that have been held across the state have helped municipal officials and employees more fully understand the challenges this Board faces. I’m happy to say those educational opportunities have been met with great enthusiasm. The League, via its 500 city and town membership, is excited to work with APERS and looks forward to seeing finalized proposals that we hopefully can support during the next legislative session. As always, my staff and I stand ready to assist in any way we can.
Sincerely,
Mark R. Hayes Executive Director
Cc via email: Sen. Bill Sample Rep. Les Warren Dir. Duncan Baird Dir. Chris Villines Dir. John Bridges
June 23, 2020 Board MeetingPresented by: Mita D. Drazilov ASA, FCA, MAAA
David L. HoffmanHeidi G. Barry ASA, FCA, MAAA
18
Agenda
• Recap of February, April and May Meetings• May 2020 Board Requested Supplemental
Valuation Packages• Possible June 30, 2020 Actuarial Valuation
Results and Projections Based Upon Board Requested Supplemental Valuation Packages
219
RECAP OF FEBRUARY, APRIL AND MAY BOARD MEETINGS
20
Introduction
• At the February Board meeting, the evolution of the unfunded actuarial accrued liability (UAAL) for APERS was discussed– $2.39B as of June 30, 2019
• At the April Board meeting:– Context was provided regarding any proposed benefit
changes that the Board may wish to pursue– The Board was presented with a preview of what the
June 30, 2020 actuarial valuation results may show depending upon various market rate of return scenarios for fiscal year end June 30, 2020
421
Introduction
• As a result of the discussions in April, the Board requested the results of certain supplemental actuarial valuations to be presented at the May meeting
• As a result of the May meeting, the following requests were made by the Board– A total of 11 supplemental valuation packages were
requested to be evaluated by various Board members– Certain historical information regarding APERS
investment return, inflation and employer contribution rates was requested to be presented
522
APERS Market Returns – 2001 to 2020
6
YearEnded
June 30
MarketRate ofReturn
ActuarialAssumed
Rate
YearEnded
June 30
MarketRate ofReturn
ActuarialAssumed
Rate
2001 (2.8)% 8.0% 2011 25.4% 8.0%
2002 (5.9) 8.0 2012 (0.4) 8.0
2003 5.0 8.0 2013 15.0 8.0
2004 12.4 8.0 2014 18.8 8.0
2005 9.3 8.0 2015 2.2 7.75
2006 11.7 8.0 2016 (0.1) 7.50
2007 17.8 8.0 2017 11.8 7.50
2008 (5.0) 8.0 2018 9.9 7.15
2009 (21.1) 8.0 2019 5.3 7.15
2010 11.6 8.0 2020
10-yr avg 2.6% 8.0% 9-yr avg 9.5% 7.7%
23
Change in CPI-W – 2001 to 2019
7
YearEnded
June 30
ChangeIn
CPI-W
YearEnded
June 30
ChangeIn
CPI-W
2001 3.15% 2011 4.06%
2002 0.77 2012 1.58
2003 2.06 2013 1.75
2004 3.20 2014 2.04
2005 2.59 2015 (0.38)
2006 4.50 2016 0.64
2007 2.65 2017 1.50
2008 5.55 2018 3.09
2009 (1.97) 2019 1.44
2010 1.36
10-yr avg 2.37% 9-yr avg 1.74%
24
APERS Employer Contribution RatesFiscal Years – 2002 to 2022
8
Valuation Date
June 30
FiscalYear
Applied
EmployerContribution
Rate
Valuation Date
June 30
FiscalYear
Applied
EmployerContribution
Rate
2000 2002 10.00% 2010 2012 13.47%
2001 2003 10.00 2011 2013 14.24
2002 2004 10.00 2012 2014 14.88
2003 2005 11.09 2013 2015 14.76
2004 2006 12.54 2014 2016 14.50
2005 2007 12.54 2015 2017 14.50
2006 2008 12.54 2016 2018 14.75
2007 2009 11.01 2017 2019 15.32
2008 2010 11.00 2018 2020 / 2021 15.32
2009 2011 12.46 2019 2022 15.32
25
MAY 2020BOARD REQUESTED
SUPPLEMENTAL VALUATION PACKAGES
26
Board Requested Supplemental Valuations
• After the May 2020 Board meeting, a total of 11 supplemental valuation packages were requested to be evaluated by various Board members
• Benefit changes requested fell into the following categories– Member Contribution Rate changes for Contributory members
Current provision is a 5% of payroll member contribution rate– Final Average Compensation (FAC) period changes
Current provision is a 3-year period– Vesting Period changes
Current provision is a 5-year period– Cost of Living Allowance (COLA) changes
Current provision is a 3% compound COLA
1027
Proposed COLA Provisions
11
Proposed COLA Provisions - Member's BenefitYear Change COLA Compound Simple
Ended in Applied Lesser of 3% or Lesser of 3% orJune 30 CPI-W June 30 3% Change in CPI-W 3% Change in CPI-W
The table below shows how the proposed COLA provisions may have operated overthe past 10 years for an APERS retiree. The member is assumed to have retired inJune of 2010 with an initial computed benefit of $10,000.
Board Requested Supplemental Valuations
• The Board also had variations about which groups may or may not be affected by any legislated changes– New hires only– New hires and non-vested members– All active members– All non-retired members excluding DROP participants
• The Board also had variations as to the phase-in period of any member contribution rate change
• Presented on the following two slides is a summary of the 11 Board requested supplemental valuation packages
1229
Packages 1 Through 5
13
No Change to Benefit Provisions (i.e., Base) Package 1 Package 2
Package 3 Package 4 Package 5
All Actives All Actives All Actives
All Actives All Actives All ActivesFAC Period
(Groups Affected)Vesting Period
(Groups Affected)COLA Provision
(Groups Affected)
6.0%; 2-year phase-in 7.0%; 4-year phase-in 7.0%; 5-year phase-inAll Contributory Members All Contributory Members All Contributory Members
5 years 5 years 5 years
5 years 5 years 5 years
Min(3%, CPI), Compound Min(3%, CPI), Compound Min(3%, CPI), CompoundNew Hires Only New Hires Only New Hires Only
Benefit Provisions ValuedMember Contribution Rate
(Groups Affected)
COLA Provision 3%, Compound 3%, Compound Min(3%, CPI), Compound(Groups Affected) All Members All Members New Hires Only
(Groups Affected) All Actives Non-vested and New Hires New Hires Only
All Actives New Hires Only All ActivesVesting Period 5 years 10 years 8 years
3 years 6 years 5 years(Groups Affected)
5.0%; no phase-in 6.5%; 2-year phase-in 7.0%; 8-year phase-inAll Contributory Members All Contributory Members All Contributory Members
Benefit Provisions ValuedMember Contribution Rate
(Groups Affected)FAC Period
30
Packages 6 Through 11
14
Package 6 Package 7 Package 8
Package 9 Package 10 Package 11
(Groups Affected) All Non-retired excl DROP All Non-retired excl DROP All Non-retired excl DROP
Vesting Period 10 years 10 years 10 years(Groups Affected) Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
COLA Provision Min(3%, CPI), Simple 3%, Simple 3%, Simple
(Groups Affected) All Contributory Members All Contributory Members All Contributory MembersFAC Period 5 years 5 years 5 years
(Groups Affected) Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
10 years 10 years 10 yearsNon-vested and New Hires Non-vested and New Hires Non-vested and New Hires
6.0%; 2-year phase-in 7.0%; 4-year phase-in 6.0%; 2-year phase-inAll Contributory Members All Contributory Members All Contributory Members
5 years 5 years 5 years
Min(3%, CPI), Simple Min(3%, CPI), Simple Min(3%, CPI), SimpleNon-vested and New Hires Non-vested and New Hires All Non-retired excl DROP
Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
Benefit Provisions ValuedMember Contribution Rate
(Groups Affected)
31
Board Requested Supplemental Valuations• The following slides present supplemental actuarial valuation results as of June 30,
2019 of Board requested supplemental valuation packages– It is assumed that the benefit changes would have been in effect as of the last valuation
date(i.e., June 30, 2019 and no recognition of phase-ins) • Column (a) on the following slides is the decrease in the June 30, 2019
amortization period (i.e., 24 years) to maintain an employer contribution rate of 15.32%
– For example, if Package 1 had been in effect and the employer contribution rate were 15.32%, the amortization period as of June 30, 2019 would have been 21.2 years (i.e., 24.0 – 4.2 = 19.8 years)
• Column (b) on the following slides is the amount the computed employer contribution rate would be decreased
– For example, if Package 1 had been in effect and the amortization period were unchanged (i.e., 24 years) for the existing UAAL, the computed employer contribution rate would have been 14.31% (i.e., 15.32% - 1.01% = 14.31%)
– Changes in the UAAL were amortized over a 20-year period• Either (a) or (b) could happen, but not both• Column (c) is the decrease to the UAAL• Column (d) is the decrease in the employer normal cost as new hires replace
current employees
1532
Board Requested Supplemental Valuations
16
Effect of Proposed Benefit Change as of June 30, 2019Either (a) or (b)
(b) (d)(a) Decrease in Total (c) Decrease in Employer Normal Cost
Decrease in Employer Decrease as New Hires Replace CurrentAmortization Contribution Rate in UAAL Employees (as a % of Payroll)
Package Period (as % of Payroll) ($ in millions) 5-Years Out 10-Years Out Ultimate
1 4.2 years 1.01% 0.6$ 0.68% 1.07% 1.89%2 7.5 years 2.02% 125.8$ 0.96% 1.53% 2.78%3 5.3 years 1.45% 125.8$ 0.68% 1.09% 1.98%
4 and 5 7.5 years 2.02% 125.8$ 0.96% 1.53% 2.78%6 5.2 years 1.34% 57.2$ 0.84% 1.34% 2.37%7 6.9 years 1.95% 57.2$ 1.08% 1.73% 3.08%8 10.4 years 3.26% 382.2$ 0.84% 1.34% 2.37%9 11.5 years 3.87% 382.2$ 1.08% 1.73% 3.08%10 7.4 years 2.05% 205.3$ 0.66% 1.04% 1.84%11 8.8 years 2.66% 205.3$ 0.90% 1.44% 2.56%
Notes:1 The current 3 year FAC of all members would be computed and then frozen with the ultimate FAC being
the greater of the frozen 3 year FAC and the ultimate 6 year (Package 1) or 5 year (Packages 2 through 11) FAC.
33
Packages 8 through 11 – Rush to the Door
• Packages 8 through 11 have a potential unintentional consequence that the other Packages do not have: “Rush to the door”– Rush to the door means that members may retire or enter
the DROP sooner than they otherwise would have to be covered under the 3% compound COLA provision
• For purposes of the results for Packages 8 through 11, it was assumed that expected retirements would increase by 25% over the 3 years following the June 30, 2019 valuation date, and that retirements in these 3 years would not be covered under the new COLA provisions
1734
POSSIBLE JUNE 30, 2020 ACTUARIAL VALUATION RESULTS AND PROJECTIONS
BASED UPON BOARD REQUESTED SUPPLEMENTAL VALUATION PACKAGES
35
Possible June 30, 2020 Results and Projections
• The following slides show possible June 30, 2020 actuarial valuation results and the potential effects on future computed employer contribution rates
• The scenarios are not meant to be predictions of what the June 30, 2020 or any other actuarial valuation results will show
• They are intended to allow the Board to compare current benefit provisions with proposed benefit provisions without commenting on the actual valuation results on each future valuation date
1936
Possible June 30, 2020 Results and Projections
• Projected actuarial valuation results are based upon the -5% market value return scenario for fiscal year 2020– The -5% market value return scenario was chosen since this was the
most reasonable estimate of the fiscal year 2020 market value return known at the time
– Projected actuarial valuation results are highly dependent upon the market value rate of return scenario chosen
• For projections purposes, it is assumed that the proposed benefit change would have been effective as of June 30, 2022– For member contribution rate changes, FY 2023 is the first assumed
affected fiscal year– For COLA changes, the July 1, 2022 COLA is the first COLA assumed to
be affected• The June 30, 2021 valuation (i.e., the valuation that determines the
employer contribution rate for the fiscal year beginning July 1, 2023) was the first valuation to reflect the proposed changes
2037
Packages 1 and 2 (Slide 1 of 2)
21
-5% Market Value (MV) Return for the Year Ended June 30, 2020;7.15% MV Return for Fiscal Years Thereafter
No Change to Benefit Provisions (i.e., Base) Package 1 Package 2
(Groups Affected) All Contributory Members All Contributory Members All Contributory MembersFAC Period 3 years 6 years 5 years
The employer rate with a maximum of a 30-year amortization period assumes that the employer contribution rate remains level at 15.32% per year until the applicable valuation date.
All Actives Excluding DROPVesting Period 5 years 10 years 8 years
(Groups Affected) All Members All Members New Hires Only
(Groups Affected) All Actives Non-vested and New Hires New Hires OnlyCOLA Provision 3%, Compound
39
Packages 3, 4 and 5 (Slide 1 of 2)
23
-5% Market Value (MV) Return for the Year Ended June 30, 2020;7.15% MV Return for Fiscal Years Thereafter
No Change to Benefit Provisions (i.e., Base) Package 3 Package 4 Package 5
(Groups Affected) All Actives All Actives Excluding DROP All Actives Excluding DROPCOLA Provision 3%, Compound Min(3%, CPI), Compound Min(3%, CPI), Compound
All Actives Excluding DROP All Actives Excluding DROPVesting Period 5 years 5 years 5 years
The employer rate with a maximum of a 30-year amortization period assumes that the employer contribution rate remains level at 15.32% per year until the applicable valuation date.
(Groups Affected) All Members Non-vested and New Hires Non-vested and New Hires All Non-retired excl DROPCOLA Provision 3%, Compound Min(3%, CPI), Simple Min(3%, CPI), Simple Min(3%, CPI), Simple
(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New HiresVesting Period 5 years 10 years 10 years 10 years
5 years 5 years 5 years(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
COLA Provision 3%, Compound Min(3%, CPI), Simple Min(3%, CPI), Simple Min(3%, CPI), Simple(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
The employer rate with a maximum of a 30-year amortization period assumes that the employer contribution rate remains level at 15.32% per year until the applicable valuation date.
FAC Period 3 years 5 years 5 years 5 years(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
Vesting Period 5 years 10 years 10 years 10 years
43
Packages 9, 10 and 11 (Slide 1 of 2)
27
-5% Market Value (MV) Return for the Year Ended June 30, 2020;7.15% MV Return for Fiscal Years Thereafter
No Change to Benefit Provisions (i.e., Base) Package 9 Package 10 Package 11
(Groups Affected) All Members All Non-retired excl DROP All Non-retired excl DROP All Non-retired excl DROPCOLA Provision 3%, Compound Min(3%, CPI), Simple 3%, Simple 3%, Simple
(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New HiresVesting Period 5 years 10 years 10 years 10 years
5 years 5 years 5 years(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
(Groups Affected) All Members All Non-retired excl DROP All Non-retired excl DROP All Non-retired excl DROPCOLA Provision 3%, Compound Min(3%, CPI), Simple 3%, Simple 3%, Simple
(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New HiresVesting Period 5 years 10 years 10 years 10 years
5 years(Groups Affected) All Actives Non-vested and New Hires Non-vested and New Hires Non-vested and New Hires
The employer rate with a maximum of a 30-year amortization period assumes that the employer contribution rate remains level at 15.32% per year until the applicable valuation date.
(Groups Affected) All Contributory Members All Contributory Members All Contributory Members All Contributory MembersFAC Period 3 years 5 years 5 years
45
29
SUMMARY
46
Summary
• There is no “right” answer as to what legislativechanges should or should not be pursued
• In establishing more formal objectives, we wouldsuggest the Board at least consider the following:– Member feedback– Which membership groups should or should not be
affected
• Open discussion and next steps…
3047
31
THANK YOU
48
Disclaimers• This presentation should not be relied on for any purpose other
than the purpose described in the presentation.• Mita D. Drazilov and Heidi G. Barry are Members of the American
Academy of Actuaries (MAAA) and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinions contained herein.
• This presentation shall not be construed to provide tax advice, legal advice or investment advice.
• Readers are cautioned to examine original source materials and to consult with subject matter experts before making decisions related to the subject matter of this presentation.
• This presentation expresses the views of the authors and does not necessarily express the views of Gabriel, Roeder, Smith & Company.
3249
APPENDIX
50
ARKANSAS PUBLIC EMPLOYEES’ RETIREMENT SYSTEM 124 West Capitol Avenue, Suite 400
Little Rock, Arkansas 72201
RESOLUTION No. 2020-__
Whereas, the Arkansas Public Employees’ Retirement System (APERS) Board is vested with the administration and control of APERS, and in this role, has a fiduciary duty to ensure that the system can meet its commitments to provide monthly retirements to its nearly 100,000 active, deferred, and retired members and their beneficiaries; and
Whereas, it is in the best interests of the membership for the system’s trust fund to remain financially strong and healthy, with a well-designed framework of benefits, contributions, and investments that allow the plan to achieve continued sustainability from generation to generation; and
Whereas, the general financial objective of APERS is to maintain its trust assets in the most prudent manner as required under the Prudent Investor Rule, A.C.A. § 24-2-601 et seq; and establish and receive contributions that will remain approximately level from generation to generation; and
Whereas, the Fiscal Year 2019 Actuarial Valuation shows that APERS has an actuarial funding value of $8.739 billion, actuarial accrued liabilities of $11.129 billion, an unfunded actuarial accrued liability of $2.390 billion and a Funded Ratio of 79%; and
Whereas, the Board has worked over the years to improve the system’s financial status without changing member benefits, by raising the employer contribution rate from 11.00% in Fiscal Year 2010 to 15.32% in Fiscal Year 2019, an increase of 39%, and by prudently investing and growing the assets of the system; and
Whereas, the board has a fiduciary duty to propose adjustments that achieve the objective of the board to cover benefit commitments for its members, and to consider the impact of adjustments made to the plan that would establish or revise a multiplier, any benefit, or a provision of a deferred retirement option plan; and
Whereas, A.C.A. § 24-4-104 gives the Board the authority to do all things necessary to carry out and make effective the provisions of the APERS laws, including the duty to propose legislation for the General Assembly to consider in order that the board may properly administer the system; and
Whereas, for the above reasons, the Board has undertaken a multi-year effort to evaluate steps to improve the long-term fiscal health and sustainability of the system, with
51
assistance and advice from its professional actuarial consultant, professional investment consultant, and APERS staff; and
Whereas, in 2019, the Executive Staff of APERS participated in 11 statewide Legislative townhall meetings attended by over 2,000 individuals to listen to the concerns, input, ideas, and suggestions from members and retirees regarding changes to benefits and contribution rates; and
Whereas, the Arkansas General Assembly will convene in 2021 for a regular legislative session which presents an opportunity for the Board to address needed changes to the plan through successfully enacted legislation; and
Whereas, the Board must act in good faith on current and projected financial circumstances to make its decisions for the benefit of the members; and
Whereas, in order to accomplish meaningful protection of APERS trust fund that portions of the law should be amended; and
Now, therefore, be it resolved, the Board of Trustees, after consideration of the review and expertise provided to the Board by its investment advisor, the expertise and projections provided by its actuary, the review and recommendations of APERS staff, and the input of the membership from the 2019 Legislative townhalls, directs staff to draft and offer proposed legislation for it to consider for the 2021 session to reach the objectives of the plan and to improve the funding status of plan, and
May it also be resolved, the Board, in seeking the support and trust of the plan members, directs the staff to continue to engage in Legislative townhalls to allow its members to voice their opinions regarding the proposal of any legislation for the 2021 General Assembly.
Adopted this _____ day of _____________, 2020.
______________________________ Candace Franks, Chair Arkansas Public Employees Retirement System
______________________________ Duncan Baird, Executive Director Arkansas Public Employees Retirement System
