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ARIZONA STATE LEGISLATURE
Fiftieth Legislature – First Regular Session
DEFINED CONTRIBUTION AND RETIREMENT STUDY COMMITTEE
Minutes of Interim Meeting
House Hearing Room 1 -- 2:30 p.m.
Chairman Ducey called the meeting to order at 2:30 p.m. and attendance was noted by the secretary.
Members Present
|
Honorable Doug Ducey, Chairman |
Representative Chad Campbell |
|
Senator Linda Gray |
Representative Justin Olson |
|
Senator Jack Jackson Jr. |
Lauren Kingry |
|
Senator Steve Yarbrough |
Alan Maguire |
|
David K. Byers |
Scott Smith |
|
Honorable Beth Ford |
Brian Tobin |
Members Absent
|
Representative David Stevens |
|
Chairman Ducey stated that the objective of the Committee per SB1609 (retirement systems; plans; plan design, Laws of 2011, Chapter 357), is to analyze the five specific items charged by the bill:
(1) the feasibility and cost of transferring existing members of a public retirement system or plan to a new defined contribution plan as well as providing for a defined contribution plan for newly hired public employees. The Committee shall examine public and private defined contribution plans in other states, including their plan designs, and the federal tax issues that affect a defined contribution retirement plan;
(2) all the existing supplemental retirement plans in the Public Safety Personnel Retirement System (PSPRS) and the Arizona State Retirement System (ASRS), the advantages and disadvantages of these supplemental retirement plans and the feasibility of merging these supplemental retirement plans to achieve maximum effectiveness and minimization of costs to members and employers;
(3) the definitions of compensation, average yearly salary and salary as used by ASRS, the Elected Officials' Retirement Plan (EORP), PSPRS and the Corrections Officer Retirement Plan (CORP) to ascertain the actuarial effect of these definitions on the respective retirement systems and plans, particularly the ability and actuality of “spiking” compensation;
(4) regarding PSPRS and CORP, the advantages and disadvantages of the local board system, the advantages and disadvantages of the agent multiple-employer public retirement system model and the feasibility of establishing a single employer public retirement system model;
(5) regarding PSPRS and CORP, the procedures, determinations and granting of accidental and ordinary disability retirements to members, the effect of the local boards in providing adequate cost controls for these disability requirements, the establishment of another medical disability tier that provides for those members who cannot perform a reasonable range of duties within the member's job classification or department but who are not totally disabled and the elimination of the local boards in making such determinations and replacing the determinations of granting medical disabilities with a single determination board in the administrative offices of PSPRS.
Chairman Ducey stated that the goal of the Committee is to protect the pension system and to safeguard the benefits for existing and future retirees.
Approval of Minutes from Previous Meetings
Mr. Maguire moved to approve the Minutes from September 27, 2011 and October 25, 2011. The motion carried.
Review and Follow-up on any Questions from the Previous Meeting
Chairman Ducey identified several issues and noted that staff needs additional time to research and that the issues will be addressed in the next meeting.
Chairman Ducey stated that “spiking” questions raised at the previous meeting will be addressed today, and that ASRS and PSPRS were asked to define “spiking” using the same methodology.
Mark Swenson, Deputy Treasurer, Office of the Arizona State Treasurer, addressed the Committee to address the “spiking” question, stating that “spiking” is defined as “when recent retirees received a greater than 25 percent pay increase in the final three years prior to retirement.” He explained that data shows that a significant number of retirees do fall within this definition.
Discussion ensued. Mr. Maguire commented that “spiking” does not apply to large numbers of retirees, but that there are a small number who receive large increases. He noted that 22 percent of recent PSPRS retirees had “spiking” and he found that troubling. He added that, in contrast, the numbers for the other retirement groups appear statistically irrelevant.
Presentation on Actuary Update on Arizona State Retirement System and Public Safety Personnel Retirement System Funded Satus
Paul Matson, Executive Director, Arizona State Retirement System (ASRS), addressed the Committee to give an update on the financial status of ASRS as of June 31, 2011. He discussed the following actuarial methods and assumptions used to make the calculations:
Mr. Matson explained that ASRS active membership is contracting and the number of retirees is growing. In response to a question from Chairman Ducey, Mr. Matson explained that a fully-funded pension has a ratio of 75 percent market value of assets to actuarial value of liabilities.
Discussion ensued on topics which included earnings on investments and funding status for health insurance. Chairman Ducey asked the probability used for these calculations; Mr. Matson replied that 50 percent is used.
Jim Hacking, Administrator, Public Safety Personnel Retirement System (PSPRS), addressed the Committee to explain the financial report for FY 2011 (Attachment 1). He discussed a wide variety of financial statistics, including:
Mr. Hacking addressed Members’ questions, explaining that aggregate employer rates are going up as the result of changes to actuarial assumptions from an 8.5 percent rate of investment return to 8.0 percent for 2012. Mr. Hacking also explained that, while the pension reform bill SB1609 was constructive and improved the baselines, more work must be done.
Mr. Maguire commented on the importance of the final charts showing significant improvements in solvency. He stressed that post-retirement benefit increases dependent upon excess returns siphon off reductions in contribution rates of active employees. He stated that it is not a good system to pit retirees against active employees, and stressed that the system must be adjusted to remedy this.
Public Safety Personnel Retirement System and Arizona State Retirement System Presentation on Multi-employer Model, Local Board System and Process for Granting Disability
Jim Hacking, Administrator, Public Safety Personnel Retirement System (PSPRS), discussed PSPRS organization (Attachment 2) which consists of a seven-member board which manages the systems and local pension boards which determine eligibility to participate in the plan and who is eligible for benefits. The local pension boards are audited by PSPRS central headquarters; any challenge is taken to the courts for administrative review.
Mr. Hacking discussed the multi-employer model (Attachment 3), wherein each employer is accountable for its own costs. In response to Chairman Ducey’s question, Mr. Hacking replied that this model is working very well. Mr. Hacking described how the challenges of communication, training, and consistency are being addressed. He explained that it is impossible to go to a single-employer, or pool plan, approach because the state cannot spread liability to all employers as each employer is responsible for its employees.
Mr. Hacking discussed statistics regarding the percentage of pensions distributed due to disability, both as numbers of individuals and as dollars. He stated that the percentage of disability pensions is fairly consistent over time at 14 percent, and that this is also the standard for the industry.
Mr. Maguire stated that the operation of local boards has been improved greatly over the last few years by the intervention of the PSPRS administrative office. He concurred that blending liabilities would be impractical and without benefit.
Paul Matson, Executive Director, Arizona State Retirement System (ASRS), explained that ASRS and PSPRS have similarities and differences in governance and management. Investment management for both PSPRS and ASRS is done by centralized staff. However, ASRS uses one funded status for pensions and one set of contribution rates.
Mr. Matson described ASRS governance structure. He explained the organization itself consists of a nine-member board which retains an executive director, staff and external audit, investment consultant, and actuary functions.
Mr. Matson explained that the ASRS appeals process, differing from that of PSPRS, is a 5-step process:
(1) member appeals to a manager
(2) manager brings it to the ASRS Director or Deputy Director for a decision
(3) if decision is unacceptable, the member can escalate to Office of Administrative Hearings (OAH)
(4) if decision is unacceptable, the member can take the appeal to the ASRS Board
(5) if that decision is unacceptable, the member can go to Superior Court or other external judicial review
Mr. Matson stated that long-term disability is appealed by inserting before step (1) an interview with a third-party private sector contract administrator to do a review before the appeal is brought to the member’s manager and into the existing process.
Public Testimony
Brent Fine, retiree, representing self, expressed his concern that the calculated average ASRS benefit of $19,500 is high because the median benefit is actually $15,000. He added that state employees receive a modest health benefit of $150, but actual cost of health insurance can be as high as $600. He opined that state employees are bearing the burden, having had no raises, and that there has been no cost of living adjustment since 2002. He stated that he is discouraged that tax decreases and tax breaks are being awarded to corporations and employers.
Sigrid Whitman, retiree, representing self, stated that the current defined benefit plan has been very beneficial and that she is not in favor of changing to a defined contribution plan. She stated her satisfaction with ASRS and her wish that no changes be imposed.
Steve Ramos, retired teacher, representing self, stated that he does not believe that a defined contribution plan would be a better investment option. He stated that ASRS is doing a very good job and that he thinks that the underfunding situation is temporary.
Todd Schwarz, current state employee, representing self, stated his hope that this Committee is not intending to drastically change the retirement plan. He said that changing the rules now would be unfair to current employees. He opined that Utah’s defined contribution plan passes risk on to the employees.
Chairman Ducey assured everyone that there is no preconceived notion about what to do to the pension system. He then announced that the next meeting will be on December 13, 2011.
Without objection, the meeting adjourned at 4:32 p.m.
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Jane Dooley, Committee Secretary
December 14, 2011
(Original minutes, attachments and audio on file in the Chief Clerk’s Office; video archives available at http://www.azleg.gov)
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DEFINED CONTRIBUTION AND
RETIREMENT STUDY COMMITTEE
November 22, 2011
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