REPORT OF THE ARKANSAS PUBLIC EMPLOYEES
RETIREMENT SYSTEM REVIEW TEAM 

A CITIZEN’S REVIEW OF THE ARKANSAS PUBLIC
EMPLOYEES RETIREMENT SYSTEM

OBSERVATIONS AND RECOMMENDATIONS

FOREWORD:
       The Arkansas Public Employees Retirement System (APERS) Review Team was chaired by George E. Breazeal and comprised the following members: Tom Dober, Tom Easterly, Mel Ingram and Jerry Watkins. On June 12, 1997, the Review Team met with staff of APERS to become better informed about functions the Agency performs, to ask questions of the Executive Director and his staff, and to collect data.

       The following information was provided the Review Team.

      Five Review Team meetings were held to discuss the material provided by the Agency. The Chairman met twice with the Executive Director and Assistant Director to seek answers to questions about the information furnished and to queries by Team members.

AGENCY PROFILE:

     APERS was created by Act 177 of 1957. PERS originally provided for the retirement of state employees only, but through the years has added county employees (Act 42 of 1959), municipal employees (Act 64 of 1961), college and university employees (Act 149 of 1963), non-teaching public school employees (Act 63 of 1965), and other governmental entities (Act 286 of 1993 and Acts 398 and 1992 of 1995). Effective July 1, 1989 (Act 653 of 1989), all newly-hired public school employees are enrolled in the Teacher Retirement System.

     APERS currently has 41 employees with an authorized complement of 47. Administrative expenses were $4,144,229 in fiscal ’95, $4,644,154 in ’96, and $3,770,926 in ’97. They are estimated to be $3,800,000 in ’98. The decline in ’97 and ’98 is due to completion of a consultant’s contract and reduced data processing fees. Salaries and benefits were $1,452,070 in ’95, $1,471,390 in ’96, and $1,526,712 in ’97 with ’98 estimated at $1,680,000. APERS administers PERS, SPRS, and JRS. Offices of the Executive Director and his staff are located in One Union National Plaza, 124 West Capitol, in Little Rock. PERS owns this building and also the Atkins Building nearby. Investment in these two buildings is $17,592,593. For the year ended June 30, 1998, operating revenues from the buildings exceeded operating expenses by $292,403.

     Each of the three Retirement Systems administered by APERS has a Board of Trustees that exercises administrative direction and control over the Executive Director and his staff, and publishes rules, regulations, and polices deemed necessary in transacting business and administering the Systems. The Board for PERS is composed of three state and three non-state employees who have ten years of service with a public employer and are members or retired members of the System. The State Auditor, State Treasurer, and Director of Finance and Administration serve as ex-officio members. Members are appointed by the Governor to staggered six-year terms. This Board appoints the Executive Director who reports to the Boards of each of the Systems.

    The PERS Board has three committees, each with three members appointed by the Chair–Administrative and Budget, Finance, and Retirement Committee. In addition, there is an Executive Committee consisting of the Chair, Vice-Chair, and the Chairs of the other committees.

     The Judicial System Board has five members appointed by the Judicial Council. The State Police System has five members–one elected by the Retired Troopers Association and four by the members of the State Police System. The Director of the State Police and the Chairperson of the State Police Commission serve as ex-officio members.

     Members of each Board of Trustees serve without pay but are reimbursed for all actual and necessary expenses. The Executive Director at the time of our visits died of cancer on January 17, 1998. He was a CPA and had held the position since July 1, 1985. The Assistant Director since October 1985 was appointed Executive Director in April 1998.

     By far, the largest expenditure by APERS is the monthly payments to retirees. Other expenditures include investment expenses, and expenses of the Executive Director and his staff. A summary of expenditures for the year ended June 30, 1997 follows.

     The SPRS paid $27,550 and the JRS $16,500 to APERS for administrative services in fiscal 1997. PERS paid the balance of APERS’s expenses. APERS follows normal state budgeting procedures, but its expenditures are funded from PERS Trust Fund.

     The agency has a network of personal computers which also has access to the state’s mainframe.

MISSION:

     The mission of APERS is to manage PERS, SPRS and JRS in a manner that will insure that the Systems can provide present and future retirement or survivor benefits for their 56,000 plus members. Preservation of capital is of paramount importance and the agency makes every effort to manage the Systems so that benefits will be paid from earned income and not from contributions or anticipated appreciation of investments. At June 30,1997, PERS was overfunded by $269 million, mostly the result of investment returns exceeding the assumed rate of 7.75, SPRS had an unfunded liability of $26.1 million and the Judicial System, $2.9 million. The 1997 legislative session provided for amortization of SPRS’s unfunded liability over 25 years by transfers of insurance premium taxes.

The Agency’s primary responsibilities are:

Contributions, earnings and net assets by System are summarized below (in thousands of dollars).

     Separate records are maintained for all aspects of each of the Retirement Systems. Funds are not commingled for investment purposes.

     APERS publishes annually a comprehensive financial report on each Retirement System that includes a financial section, an investment section, an actuarial section, and a statistical section.

GENERAL IMPRESSIONS:

     The Review Team was very favorably impressed with the APERS staff. The supervisors interviewed were knowledgeable and dedicated workers. Investment policies, asset allocation, and selection and monitoring of money managers and custodial banks are comparable to the practices in industry. The office and staff portrayed a professional atmosphere, and there was no indication of any employee morale problems. The Executive Director seemed conscientious concerning expenses of the Agency, i.e. 41 employees compared to 47 authorized.

PERTINENT PROVISIONS OF THE THREE SYSTEMS:

     Currently, PERS, SPRS and JRS are separate Retirement Systems and are administered as such by APERS. Changes or enhancements are frequently enacted by the legislature for only one System without corresponding action on the other Systems. The following pertinent provisions for the three Systems demonstrate the results of having three Retirement Systems.

Voluntary Retirement

Final Average Compensation (FAC)

Age and Service Retirement Benefit

Benefit Increases After Retirement 

Member Contribution

Deferred Retirement Option Plan

Ad Hoc Increases in Addition to Annual Cost of Living Increases Granted Retirees 1987 to Present

The Review Team perceived an attitude that an overfunded position in a Retirement System should be used for enhanced benefits, and reduction in the contribution rate was never considered.

Annual Cost as a % of Salaries

     These pertinent provisions are probably also different for the Teachers Retirement System or the Highway Retirement System, which were not assigned to this Review Team. The Review Team believes that retirement benefits, including changes or enhancements in the System, should not be a substitute for needed adjustments in current compensation, or the result of pressure by a particular group. The varying provisions of the five state Retirement Systems seem to indicate that this has happened in the past. In fairness to the employees, government Retirement Systems should provide each government employee the same retirement benefit based on earnings and length of service.

     During its 1997 session, the legislature passed 24 Acts that affected either PERS, SPRS, or JRS. Eight of the Acts will increase cost while four will produce cost savings. For example, Act 318 increased the multiplier in the PERS retirement formula for active members from 1.65% to 1.70% of Final Average Compensation and granted an ad hoc 3% increase for retired members. This Act added 8% to the cost of PERS; however, due to overfunding, no additional contribution will be required. Act 299 provided, among other things, that purchases of service credits in PERS include a realistic rate of interest which be a cost saving.

RECOMMENDATIONS:

Boards of Trustees

     In administering the Systems, each Board of Trustees issues policies and makes decisions that affect members of the System, including all members of the Board. The Boards also propose legislation regarding the Systems. To eliminate potential conflicts of interest, the Review Team recommends a Citizen Board composed of members outside the Systems to oversee APERS.

Eligibility of Elected Officials

     State, county and municipal elected officials are members of APERS with special provisions for service credits, as follows:

     For the year ended June 30, 1998, retirement benefits paid to retired constitutional officers and legislators totaled $1.6 million. Term limits should result in elected state officials accumulating only minimum retirement benefits in the future under existing plans.

     By adopting term limits for elected state officials, the citizens of Arkansas have indicated they do not want an elective position to become a career. The Review Team recommends that all elected officials be ineligible to participate in any state or public retirement system involving public funds in any form or manner.

     For several years prior to June 30, 1998, the Public Employees Retirement System (PERS) was audited annually by an independent accounting firm and also by the Division off Legislative Audit. For the year ended June 30, 1998, PERS was audited only by the Division of Legislative Audit. The State Police Retirement System (SPRS) and the Judicial Retirement System (JRS) have been audited only by the Division of Legislative Audit. To maintain independence, the Review Team recommends that an independent accounting firm audit PERS, SPRS, and JRS and that audits by the Division of Legislative Audit be discontinued.

     The audit reports by the independent accounting firm should be made public and be available from the Arkansas Public Employees Retirement System (APERS) within 60 days of presentation to APERS. The audits should include responses from any governing Board, or in the absence of a Board or other authority, then APERS.

Legislative Service

     If a member of the General Assembly subsequently works at a full-time position as a member of PERS, the years as a part-time legislator are added to the years at a full-time position to determine service credits for retirement benefits. The Review Team recommends that this be discontinued.

Deferred Retirement Option Plan

     This Plan allows active members of PERS with 30 years of service to continue employment and also have 70% of their accrued retirement benefit at date of participation paid into the Deferred Option Plan in lieu of any further benefit accruals. Tier One members of SPRS with 30 years of service can also continue employment and have 100$ of their accrued benefit at date of participation paid into the Option Plan in lieu of any further benefit accruals.

     The Review Team recommends that this Plan in all systems be discontinued because it results in double compensation and eliminates any motivation for performance for five years by the employee who elects this Option.

Use of PERS Overfunding

     As mentioned above, PERS was overfunded $269 million at June 30, 1997. In addition to annual cost of living increases, retired members were given increases of 6.45$ in 1995 and 3% in 1997. The retirement benefit of active members was increased from 1.65% to 1.70% of Final Average Compensation for each year of service with no Social Security offset. For comparison, the petroleum industry’s retirement benefit, usually considered generous, is generally 1.6% of Final Average Compensation for each year of service with a Social Security offset. There was never any mention by the APERS staff of the possibility of a reduction in cost because of the overfunding.

     With a benefit of 1.70% of Final Average Compensation for each year of service, no Social Security offset, and annual cost of living increases up to 3$, the Review Team believes the overfunding in PERS should be used to reduce the cost to the taxpayer. Therefore, the Review Team recommends that no contributions be made for each group whose actuarial accrued pension liability is overfunded until the overfunding for the group is reduced to zero.

Administrative Reorganization of the State’s Retirement Systems

     The Review Team recommends that management of Arkansas’ five Retirement Systems be consolidated under one agency. The Review Team is not familiar with the management of the Teachers or Highway Department Systems, but feels confident that APERS is capable of managing all five Systems. Sixteen states have one agency that manages more than one plan (from 2 to 8). Consolidation of management should result in consistent administration and policy. With today’s technology, consolidation could also result in a 20$-25% savings in administrative expenses, or approximately $2.8 million annually.

     The Review Team also recommends that the Joint Committee on Public Retirement and Social Security Programs request an appropriation by the General Assembly to engage the services of an actuarial firm to design one Retirement System to replace the present five Systems.

     In designing a single Retirement System, a number of principles should apply. These principles include: