REFERENCE TITLE: public retirement systems; prefunding plan

 

 

 

 

State of Arizona

Senate

Fifty-fourth Legislature

Second Regular Session

2020

 

 

 

SB 1354

 

Introduced by

Senator Livingston

 

 

AN ACT

 

amending section 35-311, Arizona Revised Statutes; amending title 35, chapter 2, article 2, Arizona Revised Statutes, by adding section 35‑314.04; Amending Title 38, chapter 5, Arizona Revised Statutes, by adding article 7.1; relating to public retirement systems.

 

 

(TEXT OF BILL BEGINS ON NEXT PAGE)

 


Be it enacted by the Legislature of the State of Arizona:

Section 1.  Section 35-311, Arizona Revised Statutes, is amended to read:

START_STATUTE35-311.  State board of investment; membership; powers and duties

A.  The state board of investment is established consisting of the state treasurer, the director of the department of administration or the director of the department of administration's designee, the director of the department of insurance and financial institutions or the director of the department of insurance and financial institutions' designee and two individuals appointed by the state treasurer, one of whom has verifiable expertise in investment management and one of whom represents a public entity with current deposits in a local government investment pool.  The state treasurer is chairman chairperson of the board.  The board shall keep an accurate record of its proceedings.  A certified copy of the record is prima facie evidence of the matters appearing in the record in any court.  A meeting of the board may be called at any time by the chairman chairperson or a majority of the board members.

B.  The state board of investment shall:

1.  Hold regular monthly meetings.

2.  Review investments of treasury monies.

3.  Serve as trustees of the permanent state land funds and provide management of the assets of the funds consistent with the requirements of article X, section 7, Constitution of Arizona.

4.  Serve as trustees of any endowments established pursuant to section 35‑314.03.

5.  Serve as trustees of any pension prefunding plan investment accounts established pursuant to section 35‑314.04.

C.  The state treasurer shall furnish to the board of investment at its regular monthly meeting a report of the performance of current investments and a report of the current investments as of the close of business of the preceding month.  The state treasurer shall make these reports available for inspection by the public during normal working hours at the office of the state treasurer for a period of time of not less than two years after the date of the report.

D.  The board of investment may order the state treasurer to sell any of the securities, and any order shall specifically describe the securities and fix the time period during which they are to be sold. Securities so ordered to be sold shall be sold for cash by the state treasurer at the current market price.  The state treasurer and the members of the board are not accountable for any loss occasioned by sales of securities at prices lower than their book value.  Any loss shall be charged against earnings received from interest or capital gains on the applicable treasury monies.

E.  The board may establish standards in addition to those established by section 35‑317, subsection A for the qualification of agents acting pursuant to section 35‑317, subsection B. END_STATUTE

Sec. 2.  Title 35, chapter 2, article 2, Arizona Revised Statutes, is amended by adding section 35-314.04, to read:

START_STATUTE35-314.04.  Pension prefunding plan investment accounts; state treasurer; investment authority; definitions

A.  In addition to the investment authority pursuant to section 35‑313, the state treasurer may invest and reinvest pension prefunding plan monies in equity securities pursuant to section 35‑314 for pension prefunding plan investment accounts.

B.  All pension prefunding plan monies shall be accounted for separately from all other funds.  Monies may not be taken from one investment account for deposit in any other investment account.

C.  All monies in pension prefunding plan investment accounts shall be invested in safe interest‑bearing securities and prudent equity securities consistent with the requirements of section 35‑314.

D.  The earnings, interest, dividends and realized capital gains and losses from the investment of each investment account shall be credited to that investment account.

E.  Pension prefunding plan monies are for the purpose of allowing employers that provide a defined benefit pension plan to their employees to prefund the employer's required pension contributions.

F.  Pension prefunding plan monies are an integral part of this state and of the political subdivisions of this state and perform an essential governmental function. Investments of pension prefunding plan monies are intended to be structured and administered in a manner that results in the tax‑exempt status of the pension prefunding plan's income.

G.  The governing body of an employer may authorize and request the state treasurer to invest pension prefunding plan monies in a pension prefunding plan investment account and set forth the terms of the distributions from such investment account for the employer pursuant to this section.

H.  Pension prefunding plan investment accounts established pursuant to this section or any other section in this title and the pension prefunding plan monies in such accounts are separate and apart from the Arizona employers' pension prefunding plan established by title 38, chapter 5, article 7.1 and the assets, receipts, earnings and income of that plan.

I.  For the purposes of this section:

1.  "Defined benefit pension" means:

(a)  The Arizona state retirement system established by title 38, chapter 5, article 2.

(b)  The elected officials' retirement plan established by title 38, chapter 5, article 3.

(c)  The public safety personnel retirement system established by title 38, chapter 5, article 4.

(d)  The corrections officer retirement plan established by title 38, chapter 5, article 6.

(e)  Any defined benefit pension plan established by the governing body of any political subdivision of this state for its employees.

2.  "Employer" means an employer as defined in section 38‑711, 38‑801, 38‑842 or 38‑881 or any governing body of a political subdivision of this state that has established a defined benefit pension plan for its employees.

3.  "Tax-exempt status of pension prefunding plan's income" means that the prefunding plan's income is excluded from gross income for the purposes of the assessment of federal income tax under section 115 of the internal revenue code, intergovernmental immunity or similar grounds. END_STATUTE

Sec. 3.  Title 38, chapter 5, Arizona Revised Statutes, is amended by adding article 7.1, to read:

ARTICLE 7.1.  ARIZONA EMPLOYERS' PENSION PREFUNDING PLAN

START_STATUTE38-931.  Definitions

In this article, unless the context otherwise requires:

1.  "Administering and investing":

(a)  Means administering, managing, operating, investing and distributing the prefunding plan and its assets, including accepting, depositing, holding, investing, reinvesting and transferring the assets of the prefunding plan.

(b)  Includes employing legal services.

2.  "Board" means the board of trustees of the system.

3.  "Defined benefit pension" means the elected officials' retirement plan established by article 3 of this chapter, the public safety personnel retirement system established by article 4 of this chapter and the corrections officer retirement plan established by article 6 of this chapter.

4.  "Employer" means an employer as defined in section 38‑801, 38‑842 or 38‑881.

5.  "Participating employer" means an employer that is authorized and has elected to participate in the prefunding plan and whose governing body has entered into a contract with the board as provided in this article.

6.  "Prefunding plan" means the Arizona employers' pension prefunding plan established by this article.

7.  "Required pension contributions" means an employer's unfunded liability and future required contributions under the applicable defined benefit pension, whether pertaining to a single year or multiple years.

8.  "System" means the public safety personnel retirement system.

9.  "Tax‑exempt status of the prefunding plan's income" means that the prefunding plan's income is excluded from gross income for the purposes of the assessment of federal income tax under section 115 of the internal revenue code, intergovernmental immunity or similar grounds.

10.  "Trustee" has the same meaning prescribed in section 38‑848.04. END_STATUTE

START_STATUTE38-932.  Arizona employers' pension prefunding plan

A.  The Arizona employers' pension prefunding plan is established as a special trust fund for the purpose of allowing participating employers that provide a defined benefit pension plan to their employees to prefund the employer's required pension contributions. 

B.  The prefunding plan and the assets held in the prefunding plan are separate and apart from:

1.  The public safety personnel retirement fund and any other fund, program or plan administered by the board.

2.  Any pension prefunding plan investment accounts established pursuant to section 35‑314.04 or any other section of title 35 and any pension prefunding plan monies in such accounts.

C.  The prefunding plan is an integral part of this state and of the political subdivisions of this state, performs an essential governmental function and is an entity with the power to sue and be sued.  The prefunding plan is intended to be structured and administered in a manner that results in the tax‑exempt status of the prefunding plan's income. END_STATUTE

START_STATUTE38-933.  Administration and investment by the board; investment options; administrative costs

A.  The board shall have the sole and exclusive control of the administration and investment of the prefunding plan.

B.  The board shall administer and invest the prefunding plan as provided in this article.  Notwithstanding any other provision of this title, the board shall offer each participating employer investment options for monies in the prefunding plan consisting of cost‑effective, diversified investment portfolios in publicly traded investment options that do not exceed the risk and return profiles established by the board, consistent with the board's fiduciary duty.

C.  Except as otherwise specified in this article, the provisions of article 4 of this chapter pertaining to the administration and investment of the system, including delegation of authority to the administrator and others persons, supplement this article.

D.  The board may keep assets of the prefunding plan separate or commingle the assets of the prefunding plan in one or more group trusts, subject to the crediting of assets, receipts and earnings and charging of payments to the appropriate employer.

E.  All assets of and income earned on the prefunding plan shall be credited to the prefunding plan.

F.  Each participating employer shall pay the reasonable administrative costs as determined by the board in its sole and absolute discretion for the administration and investment of the prefunding plan.  The board shall deposit in the prefunding plan all monies received by the board for those administrative costs. END_STATUTE

START_STATUTE38-934.  Board authorization of employer participation; employer election

A.  The board, pursuant to the terms and conditions set by the board, may authorize an employer to participate in the prefunding plan.

B.  An employer authorized by the board may elect to participate in the prefunding plan if all of the following occur:

1.  The governing body of the employer adopts a resolution requesting to participate in the prefunding plan.

2.  The employer submits a written request to participate in the prefunding plan with the resolution to the administrator of the board.

3.  The governing body of the employer enters into a contract with the board setting forth the terms and conditions of that employer's participation in the prefunding plan, including reflecting or incorporating the requirements of this article and addressing funding and expenditures and actuarial, accounting, reporting and investment considerations. END_STATUTE

START_STATUTE38-935.  Transfer of monies by employer

A.  The board may authorize a participating employer to transfer monies into the prefunding plan.  A transfer of monies into the prefunding plan shall comply with all of the following:

1.  The transfer satisfies the terms of the contract between the governing body of the participating employer and the board.

2.  The transfer satisfies the requirements under the applicable governmental accounting standards.

3.  The transfer does not jeopardize the tax‑exempt status of the prefunding plan's income.

B.  Except as otherwise provided in this section and sections 38‑936 and 38‑937, monies transferred by a participating employer to the prefunding plan pursuant to subsection A of this section are irrevocable and may not be refused by the board or refunded or returned to the participating employer making the transfer. END_STATUTE

START_STATUTE38-936.  Transfer of assets out of the prefunding plan; requirements

A.  The board may authorize a participating employer to transfer assets out of the prefunding plan if the asset transfer complies with subsection B of this section and all of the following:

1.  The transfer satisfies the terms of the contract between the governing body of the participating employer and the board.

2.  The transfer satisfies the requirements under the applicable governmental accounting standards.

3.  The transfer does not jeopardize the tax‑exempt status of the prefunding plan's income.

B.  Except as otherwise provided in section 38‑937:

1.  The prefunding plan assets shall be used exclusively for the purpose of paying required pension contributions and the administrative costs associated with the prefunding plan and may not be used for any other purpose.

2.  A transfer of assets out of the prefunding plan shall be made solely for the purpose of transferring assets to the system to discharge the participating employer's required pension contributions to the applicable defined benefit pension.

C.  The prefunding plan assets and any transfer of assets out of the prefunding plan are not subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency laws or other process of law and are not unassignable.

D.  Except for a participating employer to the extent expressly provided in subsection A of this section, an employee, member, beneficiary or other individual or person does not have any right, title or interest in the prefunding plan or any prefunding plan assets. END_STATUTE

START_STATUTE38-937.  Termination of employer's participation; prefunding plan termination

A.  The board may terminate the participation of a participating employer in the prefunding plan if any of the following applies:

1.  The board determines that all obligations of a participating employer to pay required pension contributions in accordance with the terms of the applicable defined pension plan of the participating employer have been satisfied in full by payment or by defeasance with no remaining risk regarding the amounts to be paid or the value of the assets held in the prefunding plan.

2.  A participating employer elects to cease to participate in the prefunding plan.

3.  The board finds that the participating employer has failed to satisfy the terms and conditions required by this article, by board rules or by the contract between the governing body of the participating employer and the board.

4.  The prefunding plan is terminated by the board or the prefunding plan otherwise terminates.

B.  If the board terminates the participation of a participating employer in the prefunding plan as described in subsection A, paragraph 1, 2 or 3 of this section, any assets attributable to that participating employer's transfers into the prefunding plan, including any earnings on such assets, after the payment of any obligation of that participating employer owed to the prefunding plan for reasonable administrative costs, shall be transferred to the system to pay the participating employer's required pension contributions under the applicable defined benefit pension.  Any remaining monies in excess of the amount necessary to satisfy the participating employer's required pension contributions shall be transferred to the participating employer only if both of the following apply:

1.  The transfer does not jeopardize the tax‑exempt status of the prefunding plan's income.

2.  The transfer complies with the requirements under the applicable governmental accounting standards.

C.  If the prefunding plan is terminated as described in subsection A, paragraph 4 of this section, the assets attributable to a participating employer's transfers into the prefunding plan, including any earnings on such assets, after the payment of any obligation of that participating employer owed to the prefunding plan for reasonable administrative costs, shall be transferred to the system to pay the participating employer's required pension contributions.  Any remaining monies in excess of the amount necessary to satisfy the participating employer's required pension contributions shall be transferred to the participating employer if the transfer complies with subsection B, paragraphs 1 and 2 of this section. END_STATUTE

START_STATUTE38-938.  Annual financial statements; audit; actuarial valuation report; unfunded pension liability calculation

A.  The board shall cause the annual financial statements of the prefunding plan to be prepared in accordance with the applicable governmental accounting standards and an audit to be conducted of those financial statements by a qualified independent certified accounting firm for each fiscal year in accordance with the applicable governmental auditing standards.

B.  For the purposes of the board's preparation of the annual employer actuarial valuation report regarding the defined benefit pension, a total asset amount comprised of the sum of the assets in the prefunding plan and the assets of the defined benefit pension shall be used in the calculation of the unfunded pension liability and the annual actuarial required contribution amount. END_STATUTE

START_STATUTE38-939.  Nontaxable status of prefunding plan; intent

A.  Assets transferred into or out of or held in the prefunding plan and investment income on assets in the prefunding plan are exempt from state, county and municipal taxes.

B.  The legislature intends that the prefunding plan's income not be subject to federal income tax.  The board may adopt additional rules, policies and procedures as the board deems necessary or appropriate to fulfill the legislature's intent that the prefunding plan's income not be subject to federal income tax.

C.  If the board receives notification from the United States internal revenue service that this article or any portion of this article will jeopardize the tax‑exempt status of the prefunding plan's income, the portion of this article that will cause the disqualification does not apply. END_STATUTE

START_STATUTE38-940.  Board rules; procedures; discretionary fiduciary duty

A.  The board may adopt rules, policies and procedures regarding the prefunding plan, including administering and investing the assets transferred into the prefunding plan by participating employers, investment options and termination of employer's participation in the prefunding plan, as the board deems necessary to implement this article.  The board, in administering and investing the prefunding plan, may employ services, including legal services, and do all acts, whether expressly authorized, that it deems necessary or appropriate for defending, protecting or advancing the prefunding plan.

B.  The board has full discretionary fiduciary authority to determine all questions arising in connection with administering and investing the prefunding plan, including its interpretation and any factual questions arising under the prefunding plan.  Any determination, authorization, approval, request, requirement or other action, election or decision, including the setting of terms and conditions, in connection with the prefunding plan by the board pursuant to this article is subject to, and shall be made in, the sole and absolute discretion of the board.  The board, individual trustees, the administrator, deputy or assistant administrators and employees of the board do not guarantee the prefunding plan in any manner against loss or depreciation, are not personally liable for any act or failure to act made in their official capacity in good faith and are indemnified from the assets of the prefunding plan for any judgment against any of them, including attorney fees, costs and expenses reasonably incurred in the defense of any claim arising from any act or failure to act made in good faith.  The board may appear before and maintain an action in political subdivisions of this state, courts and other forums, in each case through a representative or counsel appointed by the board, as the board deems necessary or appropriate, to defend, protect, advance or otherwise assert the interests of the prefunding plan, the board, a trustee or member of the board, the administrator, deputy or assistant administrators, employees of the board and participating employers. 

C.  A trustee or member of the board is, in discharging duties with respect to or in connection with the prefunding plan or the system, entitled to rely on, among other things, information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by any of the following:

1.  The administrator, one or more deputy or assistant administrators or employees of the system whom the trustee or member of the board reasonably believes are reliable and competent in the matters presented.

2.  Legal counsel, public accountants or other persons as to matters the trustee or member of the board reasonably believes are within the person's professional or expert competence.

3.  A committee of the board of which the trustee or member of the board is not a member if the trustee or member of the board reasonably believes the committee merits confidence.

D.  A trustee or member of the board is not liable for any action taken as a trustee or member of the board or any failure to take any action if the duties of the trustee or member of the board were performed in compliance with section 38‑848.04.  In any legal proceeding or other forum, a trustee or member of the board has all of the defenses and presumptions ordinarily available to a trustee or member of the board.  A trustee or member of the board is presumed in all cases to have acted, failed to act or otherwise discharged such duties in accordance with section 38‑848.04 and any other applicable law.  The burden is on the party challenging the act, failure to act or other discharge of duties of or by a trustee or member of the board to establish by clear and convincing evidence facts rebutting the presumption.END_STATUTE

Sec. 4.  Severability

If a provision of this act or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the act that can be given effect without the invalid provision or application, and to this end the provisions of this act are severable.