ATRS emerges from Great Recession in stronger position, assets now at $15 billion

Editor’s note: This is the second of two stories about the activities and financial position of the Arkansas Teacher Retirement System. Link here for the first report.
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When George Hopkins took over as executive director of the Arkansas Teacher Retirement System, the U.S. economy was in the middle of a Great Recession, a new president was about to take office and the state’s largest retirement fund was losing money – fast.

At the end of third quarter of 2008, just as the financial and credit crisis initiated by the subprime mortgage meltdown had reached its peak, the ATRS investment portfolio had declined by $1.2 billion to a tidy $9.6 billion after seeing four straight years of double-digit investment returns.

Then in late October 2008, former ATRS executive director Paul Doane submitted his resignation during a Legislative Joint Audit Committee meeting that questioned the former lawmaker about travel expenses and reimbursements. Hopkins, a former legislator from Malvern, said leadership problems and mounting financial woes had also caused the ATRS board to lose the support of then-Gov. Mike Beebe and the Arkansas General Assembly. About three months after Doane resigned, Hopkins was hired.

“When the board voted to hire me on Dec. 2, 2008, when I came onboard and in my talking with Dr. (Ralph) Abernathy, he emphasized ATRS had some issues and he wanted me to look at the system from all sides and figure out what we could do to restore faith in the system and the General Assembly, the governor’s office and especially with our members,” Hopkins recalled.

ATRS WAS ‘BLEEDING RED’
Hopkins said when he met with ATRS Deputy Director Gail Bolden and the rest of the staff, it became clear the system needed to be more open and transparent. On the financial side, exposure to U.S. and international equities was eroding the market value of the investment pension fund for the state’s retiring teachers.

“I got here in the middle of a financial crisis and the system was bleeding red, and every day after the stock market closed, we were asking how much more are we down through about March,” Hopkins said. “It was a pretty ugly scene.”

The retirement fund kept losing value through 2009 and into 2010, but Hopkins and his staff began to see things improve as the stock market and U.S. economy improved. With the help of the system’s investment and real estate consultant Aon Hewitt’s, Hopkins said the system began to cut its exposure to U.S. and international stocks and diversify its multibillion dollar portfolio.

“Arkansas law says we can make an investment of any kind without an outside expert advisor. To an extent, our consultant Aon Hewitt has driven that philosophy but they also have institutional investors that have a far different asset allocation,” Hopkins said. “So, I think to a large extent, the ATRS board and staff working with Aon Hewitt has driven that philosophy.”

And even though Doane left ATRS in the midst of the financial crisis, Hopkins credits the former director for putting the system in the right position before the Great Recession began.

“Let me say this, when (former director) Paul Doane was at ATRS for a very short time, he had some innovative and futuristic views of investing that I think helped drive our system in the direction we have gone,” Hopkins said. “And basically, he had set up a lot of that and I think the economic crisis hit and the board was faced with a situation of asking; “Do we stay the course, or do we leave it?’ … We looked at it and the board looked at it, and we decided to stay the course, and are far better off than a lot of other retirement funds who chose a different route. I give Paul Doane on his investment view high marks for what he did for us.”

OPEN AND TRANSPARENT
Hopkins said the other key part of making the system healthy again was becoming more open and transparent. The former lawmaker is well known in the public retirement community for opening a Twitter and Facebook page, and sends out regular executive investment updates to school districts across the state to share with their teachers.

In addition, ATRS’s website was revamped after Hopkins became executive director, and today the system’s more than 125,000 members can access their accounts, read board minutes and records and learn about any changes that may affect their benefits.

Still, Hopkins believes the best way to communicate with ATRS members is to travel the state to meet with retiree groups or to take their calls directly when they have a question or a problem. Following the financial crisis, he said it was difficult telling members the fund was losing money every day.

“The retiree groups wanted me to start coming out and talking to them and I thought the best thing to do was to tell them frankly where we were and what that meant,” he said. “But overall, I thought we had to be more transparent.”

Hopkins still sends out daily “Tweets” on everything from play-by-play on the U.S. stock market to his monthly congratulations to retiring teachers who are joining the system. On July 27, he tweeted: “Congratulations to the 1,638 new ATRS retirees who will wake up this morning to a special thanks in their bank accounts. Thank you so much!”

But more importantly to Hopkins and his 70-person staff is that the state’s largest public retirement fund is healthy. At the end of fiscal 2009, following total investment declines of 18.7%, the system had a total of 115,870 participants in the system, which included 28,818 retirees, 4,631 T-DROP participants and more than 70,000 active members. At the time, the system’s net asset had fallen to $8.8 billion with an unfunded liability of more than $3 billion, or 75.7%

ATRS’ net pension liability is now up to a robust 82.2%, or $3.2 billion, with total pension liabilities of $18.2 billion and net assets of $$15 billion. According to the Pew Center on the States, the net pension liability – which is the actuarial measure of difference between the total pension liability and the assets set aside to pay current employees, retirees and beneficiaries – is important because many states and municipal governments have not fully funded their pensions.

In fact, the gap between the promises states have made for public employees’ retirement benefits and the money they have set aside to pay these bills tell to $1.38 trillion in fiscal year 2010 and is expected to remain between $800 and $1 trillion over the next decade or so, Pew predicts.

That is important because the ATRS membership has grown to 126,046 as the number of Arkansas retired teachers continues to grow.

“We understand here that five or ten dollars a month makes a difference for our members. On one hand, we deal with billions of dollars, but on the other we understand how that trickles down,” Hopkins said. “When we made our payments to retirees for their first retirement check, we paid out over $85 million on July 27. And most of that money stays in Arkansas.”

Going forward, Hopkins is still cautiously optimistic the teachers’ retirement fund will continue to grow and stay healthy. With the recent Brexit fallout and a choppy economy, the ATRS chief joked that he is OK with consistent single-digit yearly growth of 8% after a wild swing from a 19.27% rate of return in 2014 to only 4.34% in 2015.

“I think that needs to be ratcheted down, and I think you will be seeing us do that in the future,” he said.

LEGISLATIVE AGENDA
Also going into the 2015 legislation session, Hopkins said the ATRS 15-person board is concerned about the increasing outsourcing of school services that affect contributions into the ATRS fund.

“Under Arkansas law teachers have to be employees, but bus drivers, custodial worker, lunchroom workers and teachers’ aides do not have to be,” he said. “A lot of school districts have started taking those people off their payrolls and hiring contractors, and what we have seen is that sometimes a reduction in the total salary paid by the (schools) that we get that important contribution … hurts us.”

Hopkins said he is starting to see a trend that will affect the loss of contributions that the system would have if those positions were not outsourced.

“To an extent, our board has talked about an efficiency charge of some small amount that could be implemented over time,” he said.

The ATRS chief said he and the system’s board now have a great working relationship with Gov. Asa Hutchinson’s staff and the Arkansas General Assembly and wants to continue looking at new ideas to in the upcoming 2017 fiscal session to protect the contribution income stream and make investments that are wise and prudent for Arkansas teachers, relying less on the stock market.

“We have over 14,000 people today that could turn in their retirement application tomorrow and start drawing retirement benefits that we have not projected,” Hopkins said. “I tell people the retirement system is just a big engine, if you listen to it carefully you can start to hear before an issue becomes bad and spot an issue well before it becomes an emergency and try to deal with it.”