Thursday, October 27, 2011

Week In Review

State Capitol Week in Review

LITTLE ROCK – The Arkansas Teacher Retirement System is recovering well from the stock market declines of 2009 and is in solid financial health.

The Board of Trustees met recently to approve a new set of economic assumptions, which its actuaries will use to calculate the long-term financial condition of the state's largest retirement system.

One of the major changes was to lower the projected long-term increase in teacher salaries from 4 percent to 3.25 percent a year. The change was based on factors such as the Arkansas law that requires a balanced budget, the health of the Arkansas economy and the state's political climate.

As of September 19, the system paid benefits to 33,782 retirees. There are 89,624 active members currently contributing into the system. Its net asset value on June 30 was $11.7 billion, but that amount changes daily and because of the volatility of the stock market it can change dramatically.

The system's assets are diversified among domestic and global stocks, fixed income securities and smaller categories like real estate and timber holdings.

The system's actuaries will report back to the Board on December 5. Their report will take into account a demographic trend - retirees are living longer, which means that over their lifetimes the system will pay them more in benefits.

When the stock market crashed in 2009 the system's assets declined by about $2 billion, but since then that amount has been recovered. In the fiscal year that ended June 30 the system's investments gained in value by 22.3 percent, which represents a $2 billion increase .

Since June 30, 2009, the system's unfunded liabilities have gone down by about $1.5 billion, from $5.2 billion to $3.7 billion.

The systems' finances also will improve, although in relatively smaller amounts, because the legislature enacted 19 bills in the 2011 regular session to protect its financial integrity. For example, under Act 69 of 2011 members who purchase years of service will have to pay the actual value, according to actuarial estimates. Previously, they purchased years of service at a discount.

It will take several years for the full effect of the legislation to be felt, but estimates are that in the first year they will save the system about $10 million. Over time they will save $30 million a year and quite possible more.

Actuaries are the "numbers crunchers" who calculate a wide array of financial and demographic data. When they make projections about future earnings, and when they account for past and present earnings, they combine earnings reports in four-year groupings. Therefore, when the actuaries make their official report to the Board, last year's 22.3 percent increase in asset value will be averaged with past years when the stock market performed so poorly.

It's a way of "smoothing" the dramatic spikes and troughs that occur in the stock market, in order to get a more accurate picture of the system's long term performance.

Another way that retirement systems gauge their long term financial health is to measure the years it would take to pay off all benefits that members have earned over their expected lifetimes. The Arkansas Teacher Retirement System currently has an amortization period of an estimated 52.4 years. Actuaries and retirement officials expect that period to lengthen to 60 or perhaps 70 years when the next report is submitted to the Board.

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