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Teacher retirement investments in Arkansas see $1.4B dip

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The Arkansas Teacher Retirement System’s investments have dropped in value from $21.7 billion to $20.3 billion so far this year, officials for the system and its investment consultant said Monday.

Also Monday, the system’s trustees authorized up to $105 million in new real estate and private equity investments, and discussed possible options for the system to help with the shortage of teachers in Arkansas.

The teacher retirement system is state government’s largest retirement system, with more than $20 billion in investments and than 100,000 working and retired members.

In the quarter that ended March 31, the system’s investments dipped in value from $21.7 billion to $21.6 billion, Aon Hewitt Investment Consulting said in a written report to the system’s trustees. The system’s investment return for the last quarter was minus 0.3 %, according to the consultant.

Aon Hewitt’s Katie Comstock said the retirement system’s bottom line was bolstered last quarter by netting $507.4 million out of a $642.8 million settlement of a lawsuit that the system filed in July 2020 in federal court in New York seeking to recover losses that the system claimed it incurred as a result of negligence and breaches of fiduciary and contractual duties by Allianz Global Investors U.S., LLC, and related defendants.

However, in April, the value of the teacher retirement system’s investments fell from $21.6 billion to $20.6 billion based on Aon Hewitt’s preliminary report for the month.

The preliminary report for April reflects changes in the system’s stock, bond and opportunistic and alternative investments, but not changes in the system’s real estate, timber, agriculture, infrastructure and private equity investments. The report shows that the system’s investment return in April was minus 4.6 %.

Comstock said the system suffered investment losses last quarter and in April in both the stock and bond markets.

The declines continued in May and early June, with the system’s investments now valued at roughly $20.3 billion with its fiscal 2022 budget year set to end on June 30, system Executive Director Clint Rhoden said Monday during a break of the trustees’ meeting. The system’s target rate of return is 7.25 % a year.

The system’s investments ended fiscal 2021 on June 30, 2021, valued at $21.1 billion after gaining $4.5 billion as the stock market boomed. The system’s investment return was 31.9% in fiscal 2021, ranking its performance among the top 5% of the nation’s large public pension systems, Aon Hewitt Investment Consulting reported last fall.

On Monday, Comstock said that the system has recorded strong investment performances over past five and 10 years. The system’s investment return has averaged 10.6 % a year over the past five years and 10% a year over the past 10 years through March 31, according to Aon Hewitt. That ranks among the top 10% of the nation’s public retirement systems, the consultant said.

As of June 30, 2021, the system’s unfunded liabilities totaled $4.6 billion, according to the system’s actuary, Gabriel, Roeder, Smith & Co. Unfunded liabilities are the amount by which the system’s liabilities outstrip an actuarial value of the system’s assets. Gabriel said the projected payoff period for the unfunded liabilities is about 32 years.

Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.

As of June 30, 2021, the system had 66,663 working members not on the deferred retirement plan, with an average age of 44.2 years, average service of 10.5 years and average salary of $42,901 a year, according to Gabriel. The system also had 3,465 working deferred retirement members with an average salary of $65,732 a year.

The system had 51,405 retired members receiving an average retirement benefit of $24,175 a year as of June 30, 2021, Gabriel reported.

In other action Monday, the trustees authorized an investment of up to $75 million in the New York-based Blackstone Group’s Blackstone Real Estate Partners Fund X. The fund invests in large-scale real estate assets primarily in the United States and Canada, and also will have exposure to Europe and Asia via Blackstone Asia and Europe funds, according to the system.

The trustees also authorized an up to $30 million investment in Boston-based BV Investment Partners’ BVIP Fund XI, L.P.

The fund is being formed primarily to make acquisitions of U.S. middle market companies in the tech-enabled business services and information technology service sectors, according to the system’s private equity consultant Franklin Park.

RETURN TO WORK

Also on Monday, Rhoden raised the idea of possibly recommending legislation reducing the required six-month separation period before members who retire but who haven’t reached the normal retirement age can return to work for an employer covered by the system. Rhoden raised the idea of reducing that period to three months, to help public schools with a shortage of teachers, bus drivers and other employees.

Rhoden said the system has 9,000 retired members 50 to 65 years old who are currently eligible to return to work. He said the system could send these members a letter informing them about the teacher shortage and the possibility of their returning to work in the public schools. He said he wouldn’t send out the letter without consulting education leaders in the state and without the board’s approval.

Act 290 of 2021 modified the definition of normal retirement age for system members to be 65 years with five years of service or age 60 with total service of at least 38 years.

A system member who has attained the normal retirement age is able to draw full retirement benefits and remain employed without separating from employment. System members who do not meet the normal retirement age cannot return to employment in a position covered by the system within six months of their effective date of retirement or their retirement will be canceled.

Trustee Mike Hernandez said requiring these retired teachers to separate from their employment from July 1 until Oct. 1 after they retire before returning to work wouldn’t be much of a benefit to public schools starting school in September.

Rhoden said another option would be to recommend changing state law to permit a waiver of part of the six-month separation period for these retired members to return to work under certain circumstances.

Another option, Rhoden said, could be recommending changing state law to permit system members to purchase service credit for gaps in their service for up to five years to encourage the system’s members to return to work. He said the Legislature is expected to be called by the governor into a special session within the next few months.

POTENTIAL LEGAL ACTION

On Monday, the system’s trustees also authorized the system’s staff to pursue the possibility of becoming lead plaintiff in a class-action lawsuit against Amazon.com Inc. Two securities monitoring firms, CohenMilstein and Labaton Sucharow, alerted the system about possibly pursuing lead plaintiff status in the case, said Martha Miller, legal counsel for the system.

The class-action lawsuit filed against Amazon.com in May in federal court in Washington state alleges that throughout the class period, defendants made materially false and misleading statements regarding the company’s business, operations and compliance policies. The teacher retirement system’s estimated investment losses are about $12 million in this case, Miller said.

In March, the trustees voted to authorize the system to seek to become lead plaintiff in a class-action lawsuit against the London-based information services and analytics company Clarivate, after Miller estimated that roughly $2.5 million to $3 million in investment losses are at stake.

On Monday, Miller told the trustees that the system decided not to pursue lead plaintiff status in the lawsuit against Clarivate because there are other institutional investors with larger losses than the system.