Legislative Council Study Committee to Evaluate the Arizona State Retirement System final report

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FINAL REPORT
LEGISLATWE COUNCIL STUDY COMMITI'EE
TO EVALUATE THE ARIZONA STATE RETIREMENT SYSTEM
January 1991
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FINAL REPORT
LEGISLATIVE COUNCIL STUDY COMMI'ITEE
TO EVALUATE THE ARIZONA STATE RETIREMENT SYSTEM
January 1991
This final report of the Legislative Council Study Committee to Evaluate the Arizona State
Retirement System is submitted to the Speaker of the House of Representatives and the
President of the Senate pursuant to Laws 1989, Chapter 310, section 22.
Dr. Richard Smith
yo \
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'Mr. Lowell Sutton
Senator Hill
Senator Osborn
Senator Mawhinney
Representative Cajero
Representative Wessel ./
/ ./
r<1?'L--'7- <'-> ~#
Representative Gertfrd /
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BACKGROUND
Laws, 1989, Chapter 310, provided for the establishment of a fifteen member study committee
to examine numerous issues relating to the Arizona State Retirement System (see
Attachment A). Specifically, the study committee was charged with examining the following:
1. ASRS's current benefit structure, compared to benefits provided by other states'
retirement systems and private pension systems.
2. The partial health and accident insurance premium payments authorized for ASRS
retirees with ten or more years ofcredited service and their dependents pursuant to Laws
1988, Chapter 307, section 1.
3. The sufficiency ofthe statutes relating to the Arizona State Retirement System and Plan
and whether the existing statutes are being followed and implemented.
4. The composition, function and effectiveness of the Arizona State Retirement System
Board and the Investment Advisory Council.
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5. The policies regarding post-retirement benefit increases for retired persons.
6. The policies regarding early retirement incentives and the feasibility of implementing a
corresponding actuarial reduction in benefits.
7. Whether the present funding ofthe Arizona State Retirement System adequately ensures
that advanced funding of the system is provided on a sound actuarial basis.
8. The feasibility of requiring by legislation or rule a requirement that all proposed
retirement legislation be accompanied by actuarial cost estimates produced by an
independent actuary responsible to the Legislature, indicating the actuarial assumptions
used, the method used to compute the cost, the potential annual cost rates and the total
additional liability created by the proposal.
9. The present investment guidelines of the system with a policy goal of providing for
allowable investments in order to provide timely payment to the system's beneficiaries
in their retirement.
10. TIle implications of continuing the state's partial tax exempt status on pensions received
by retired ASRS members.
11. The feasibility of increasing benefits to future retirees to hold them harmless as a result
of taxing the benefits they receive on retirement.
12. Any other areas the committee determines is necessary in order to properly evaluate the
Arizona State Retirement System.
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COMMITI'EE PROCEEDINGS
The study committee held four public meetings as follows:
September 18. 1989 (See Attachment B)
At the study committee's first meeting presentations were made to help familiarize committee
members with how the Arizona State Retirement System operates and compares with other
public pension plans. Mr. Michael Carter of the Wyatt Company presented an analysis of
ASRS retiree spendable income. The analysis compared the spendable income ofstate retirees
after retirement with the income members were receiving before retirement to determine how
well the retirement plan is providing benefits to its members. Also, Mr. Ed Gal/ison, executive
director of ASRS, addressed the committee to both explain how the state retirement system
operates and how it compares with other states' retirement systems, particularly with respect to
benefits. Both Messrs. Carter and Gal/ison concluded that ASRS compared favorably with
other states' pension plans. The meeting concluded with Mr. Gal/ison and several other
members of the audience presenting their respective "wish lists" for proposed legislation during
the 1990 legislative session.
December II. 1989 (See Attachment C)
The study committee's second meeting focused on the retiree health insurance premium subsidy
benefit program. In 1988, the legislature passed a retiree health benefit to help offset increasing
health care costs for state retirees. To be eligible for the benefit, retirees had to have at least
ten years of credited service and be either enrolled in their former employers' health care
coverage or join the coverage offered to retirees by the State ofArizona (FHP currently has the
state contract). Numerous technical and administrative difficulties arose with implementing the
benefit, thus causing a troubled first year for the program. The majority of complaints about
the program came from retirees concerned about: 1) •administration of the program; 2) having
to have at least ten years of credited service; and 3) having to join the coverage offered by the
State (if they were not covered by their former employer).
Mr. Ed Gallison, Ms. Cathy McGonigle (DOA Personnel Director) and Mr. Bruce Bodaken
(FHP Regional Vice President) addressed the committee to explain: 1) why the problems arose
during the previous year; 2) what steps have been taken to ensure a smootherprogram year; and
3) how successful the program has been thus far. The general consensus from both those
making formal presentations and comments from the public was that the retiree health benefit
program is (after a "bumpy" start) working well. Concerns over retirees having to change
insurance caniers, in general, and concerns with FHp, in particular, have been mitigated due
to better information provided to retirees about FHP. It was also explained that FHP's rates
increased only 11% compared with health insurance increases over 20% nationwide. FHP
offers both indemnity and HMO coverage and was the only company to bid on both retirees
under and over age 65. There remained concern over the ten-years-of-service requirement and
several committee members and retirees stressed the need to proportionately reduce the health
benefit for retirees with between five and ten years of credited service.
Laws 1989, Chapter 310 authorized the committee to hire consultants for technical or legal
services as necessary and as approved by Legislative Council. During the second meeting, the
committee reviewed and adopted a proposal for consulting services submitted by the actuarial
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firm of Kaufmann and Goble. Subsequently, on December 12, 1989, Legislative Council
approved the committee's recommendation that the firm of Kaufmann and Goble be hired.
The consultants were directed to look at the items specified in Laws 1989, Chapter 310, with
the exception of item #2 (relating to the retiree health benefit program); item #3 (relating to
the sufficiency of statutes); item #8 (relating to an independent actuary responsible to the
legislature); items #10 and #11 (relating to the taxation of retiree pensions); and item #12
(relating to "other' areas). The committee capped the fee for consultant services at $57,820.
January 3,·1990 (See Attachment D)
The study committee met a third time to consider and adopt the following recommendations:
1. Continue the work ofthe Legislative Council Study Committee to Evaluate the Arizona
State Retirement System through December 31, 1990.
(Co-chairman Hull explained to the committee that legislation concerning this
recommendation would not be necessary since she and President Usdane can reappoint
the committee on their own motion.)
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2. Extend but reduce the partial health and accident insurance premium payments
authorized for retirees with ten or more years of credited service to retirees with five or
more years of service proportionately as follows:
5 to 5.9 years of service = 50% of the premium payment
6 to 6.9 years of service = 60% of the premium payment
7 to 7.9 years of service = 70% of the premium payment
8 to 8.9 years of service = 80% of the premium payment
9 to 9.9 years of service = 90% of the premium payment
Also, Mr. Gallison and Cathy McGonigle were instructed to determine whether
administration of the retiree health benefit should remain under the Department of
Administration or be transferred to the Arizona State Retirement System. The retiree
health benefit program was originally placed under DOA because it was incorrectly
assumed that the health insurance carriers covering active state employees would also
cover state retirees. After examining the issue, Mr. Gallison and Cathy McGonigle both
agreed that administration ofthe retiree health benefit program should be transferred to
the Arizona State Retirement System.
[Legislation was introduced during the 1990 legislative session to address these
recommendations and was subsequently signed into law (Laws 1990, Chapter 235)J.
3. Extend the three percent "hold harmless" benefit increase enacted during the 1989
legislative session to September 15, 1990, retroactive to September 15, 1989. (This
benefit was provided to help offset taxation ofretiree pension income enacted in response
to the US Supreme Court ruling in Davis v. Michigan.)
[Legislation was introduced during the 1990 legislative session to address this
recommendation and was subsequently signed into law (Laws 1990, Chapter 217)).
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December 5, 1990 (See Attachment E)
At the study committee's fourth and final meeting, Messrs. Sidney Kaufmann and Don Hurtado
presented the findings and recommendations contained in their Final Report on the Study of
the Arizona State Retirement System (see Attachment F). Mr. Michael Carter, from the Wyatt
Company, was also asked to appear before the study committee to comment on the consultants'
report (see Attachments G and H). Co-chairman Hull explained to the committee and
audience that Messrs. Kaufmann and Hurtado were commissioned by the study committee to
evaluate the Arizona State Retirement System and Mr. Carter was asked by the State Retirement
System Board to respond to the consultants' report. She noted, however, that it did not turn
into a case of "battling consultants." Instead, the focus of all three consultants' work was an
emphasis on protecting and helping current and future beneficiaries of the State Retirement
System. Co-chairman Hull emphasized that this remains the objective of the study committee
and she hoped that this kind of cooperative effort was a signal of good things to come.
Following formal presentations, the committee received testimony from the public on various
aspects of the consultants' report.
Following public comment, the committee considered each of the recommendations contained
in the consultants' report and adopted this final report. The next section of this report
summarizes the recommendations adopted by the study committee. Staff was asked to draft
legislation accordingly.
RECOMMENDATIONS
Recommendations
Committee Action: Adopted.
Committee Action: Did not adopt.
EXAMINE THE CURRENTBENEFITSTRUCTURE OF THE SYSTEMAND
COMPARE IT TO THOSE BENEFITS PROVIDED BY OTHER STATE
RETIREMENT SYSTEMS AND PRIVATE PENSION SYSTEMS
ITEM 1:
4. Amend the Arizona State Retirement System's present joint and survivor annuity option
to eliminate the option to revoke the election under certain circumstances, and replace
this feature with a one-time election at retirement to take a [sic] actuarially reduced
benefit in favor of a ''pop-up'' option to provide for the circumstance of the survivor
annuitant dying before the beneficiary.
5. Major benefit enhancements should not be made to the Arizona State Retirement
System's present benefit plan and structure.
Committee Action: Adopted. Staff was asked to further consult with legal counsel
concerning this recommendation.
Committee 4ction: Adopted. (Note, however, that the reference to Figure 1 is as
amended pursuant to Michael Carter's comments.)
Committee Action: Adopted, but amended to incorporate Michael Carter's comments
concerning this recommendation. (Minority Report--Attachment I)
2. The definition of the Trost Fund Nature of the Arizona State Retirement System
presented in Figure 3 [of the consultants' final report] should be incorporated into State
Statutes.
3. Future enhancements to the Arizona State Retirement System's basic benefit plan and
structure should be consistent with the statutory Statement of Primary Intent (reference
Figure 1) [of the consultants' final report].
The study committee voted on recommendations proposed in the consultants' final report as
follows:
1. The Arizona State Retirement System Statement of Primary Intent presented in Figure
1 [of the consultants' final report] should be incorporated into State Statutes.
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Recommendations
Committee Action: Adopted.
Committee Action: Adopted.
Committee Action: Adopted.
EXAMINE THE COMPOSITION, FUNCTION AND EFFECTIVENESS OF
THE ARIZONA STATE RETIREMENT SYSTEM BOARD AND THE
INVESTMENTADVISORY COUNCIL
6. The Arizona State Retirement System should regularly and frequently inform active
members about the availability of the supplementa~ optional employee paid retirement
benefits programs available through their employers.
Committee Action: Adopted.
2. Consideration should be given to increasing the term ofthe Investment Advisory Council
members to three, three-year terms.
ITEM 4:
7. The RetirementBoard should institute an aggressivepublic information/relationsprogram
designed to bring about a greater awareness among employees, retirees, employers and
Legislators...ofthe excellence ofthe Arizona State Retirement System and its outstanding
retirement benefits as compared to other public pension plans and the private sector.
Committee Action: Adopted.
Committee Action: Adopted.
4. Consideration should be given to providing representation on the Retirement Board that
would bring Legislative perspectives to the overall administration of the Arizona State
Retirement System (e.g., this Legislative perspective might be provided by designating the
chairman of the House Government Operations Committee and the chairman of the
Senate Finance Committee, and their successor committees' chairman as advisory
members).
3. The statutory experience qualifications for the members of the Investment Advisory
Council should be increased so that all members are required to have at least ten years'
experience as professionals in the investment management field.
1. A statutory limit should be placed upon the amount oftime allowed for filling a vacancy
on both the Retirement System Board and the Investment Advisory Council.
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5. Consideration should be given to establishing a permanent, ongoing Public Employees
Retirement System Sub-committee to oversee all Arizona public employees retirement
systems, which could function as part of both the House Government Operations
Committee, and the Senate Finance Committee, and their successor committees.
Committee Action: Adopted.
6. In keeping with the definition ofthe Trust Fund Nature ofthe Arizona State Retirement
System as presented in Figure 3 [of the consultants' final report], the Arizona State
Retirement System should have greater flexibility over its annual budget determination
and expenditures (e.g., exemption from the traditional budgetary review and approval,
and procurement authorities similar to that of the Arizona Public Safety Personnel
Retirement System; or optionally allowing full discretionary expenditure up to some
limitation such as a fractional percentage of total market value of assets).
Committee Action: Accepted for further study.
7. The Retirement Board should institute a forma~ on-going professional development and
education program for all members ofthe Retirement Board, particularly in subjects on
public employees retirement systems administration, benefit planning and design,
actuarial valuation theory, investment management theory, the Arizona Legislative
process, and other appropriate subjects; and funds should be appropriated for this
purpose to be paid from the Administration Account of the Arizona State Retirement
System.
Committee Action: Adopted, but amended to also include advisory members of the
board.
8. The Retirement Board, and the Director ofthe Arizona State Retirement System, should
institute a formal, on-going program for active participation by all Retirement Board
members and the Director in the various professional and trade organizations which are
relevant to the activities of a public employees retirement system; and funds should be
appropriated for this purpose to be paid from the Administration Account ofthe Arizona
State Retirement System.
Committee Action: Adopted.
Additional recommendations adopted by the study committee pertaininr to Item 4:
1. Several of the study committee members noted they had received letters and calls from
persons dissatisfied with recent activities of the ASRS Board. The committee directed
staff to look further at how various states' retirement systems are administered.
2. The study committee also agreed that qualifications for the ASRS's director need to be
prescribed in statute.
Recommendations
Committee Action: Accepted for further study.
Committee Action: Accepted for further study.
Commitke Action: Accepted for further study.
EXAMINE THE POLICIES REGARDING POST RETIREMENTBENEFIT
INCREASES FOR RETIRED PERSONS
ITEM 5:
Committee Action: Accepted for further study (as to cost implications) and amended
as follows: the words "to using part ofthe initial funding capacity ofthe Post Retirement
Benefit Enhancement Dedicated Trust Fund" were deleted.
1. Future Post-Retirement Benefit Enhancements should be granted only if they are
consistent with the statutory Arizona State Retirement System Statement Qf Primary
Intent (reference Figure 1) [in the consultants' final report].
Committee Action: Accepted for further study.
2. The Post-Retirement Benefit Enhancement Dedicated Trost Fund concept described in
Appendix 9 [in the consultants' final report] should be statutorily implemented, with the
first annual distribution being made on July first of the first full year following
enactment.
3. Statutorily require that future Post-Retirement Benefit Enhancements be granted only
if they can be funded via the Post-Retirement Benefit Enhancement Dedicated Trost
Fund (reference Appendix 9) [of the consultants' final report]; and that Post-Retirement
Benefit Enhancements cannot be funded from increases in the contribution rate orfrom
the primary Public Employees Retirement Trost Fund.
Commitke Action: Accepted for further study.
4. Consideration should be given to using part of the initial funding capacity of the Post­Retirement
Benefit Enhancement Dedicated Trost Fund to bring the old 1.2% and 1.5%
fonnula retirees' benefits up to a benefit based upon the present 2.0% fonnula...if such
calculation would result in a benefit which exceeds the present benefit.
5. Statutorily provide for future Post-Retirement Benefit Enhancements being granted only
to those retirees who have reached age 65 and who have been retired for three or more
years.
6. Statutorily prohibit future Post-Retirement Benefit Enhancements from being provided
on an equa~ across the board, lump-sum dollar amount basis; and require that such
Post-Retirement Benefit Enhancements be based upon a percentage ofretirement benefit
amount, or reflect years ofservice credit such as providing a fixed dollar amount peryear
of service.
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Recommendations
Recommendations
Committee Action: Adopted.
Committee Action: Accepted for further study.
EXAMINE THE POLICIES REGARDING EARLY RETIREMENT
INCENTIVES WITH A PARTICULAR EXAMINATION ON THE
FEASIBILI1Y OF IMPLEMENTING A CORRESPONDING ACTUARIAL
REDUCTION IN BENEFITS
DETERMINE WHETHER THE PRESENT FUNDING OF THE ARIZONA
STATE RETIREMENT SYSTEM ADEQUATELY ENSURES THAT
ADVANCED FUNDING OF THE SYSTEM IS PROVIDED ON A SOUND
ACTUARIAL BASIS
Committee Action: Adopted, but amended to incorporate Michael Carter's comments
concerning this recommendation. (Note: The committee adopted the
minimum/maximum funding level concept in general, but felt that further study was
needed to determine what that funding level should be.)
Committee Action: Adopted, but amended as follows: the words "statutorily prohibited"
were replaced with "discouraged."
ITEM 6:
7. Statutorily provide that future Post-Retirement Benefit Enhancements be granted only
as a percentage ofthe retirement benefit, and not as a fixed dollar amount...and granted
only within the funding availability constraints of the Post-Retirement Benefit
Enhancement Dedicated Trust Fund.
ITEM 7:
2. The early retirement adjustment factors should be corrected to more closely reflect the
actuarial equivalent benefit.
1. Early retirement incentives, such as the 2.2% retirement incentive window, should be
statutorily prohibited...unless it can be predetermined that the anticipated quantified
savings will be greater than the incentives' costs to the Arizona State Retirement System
and, ultimately, to the employers and employees.
1. The Arizona State Retirement System Primaa' Funding Objectives presented in Figure
2 [of the consultants' final report] should be incorporated into State Statutes.
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2.
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Statutorily establish the objective of maintaining the Arizona State Retirement System's
Actuarial Value Fundin~ Ratio at a minimum funding level of 1.05 to provide a reserve
for contingencies and losses from unanticipated market and investment volatility.
Committee Action: Adopted with the following amendments: 1) the word "minimum"
was replaced with "target",· 2) the words "of 1.05" are stricken; and 3) the target funding
level is to be determined after further study.
The statutory, actuarially determined contribution rate should be constitutionally shielded
from legislated reduction.
Committee Action: Did not adopt.
Statutorily provide that any actuarially determined overfunding in excess ofthe Actuarial
Value Fundin~ Ratio's 1.05 funding level be annually transfen-ed from the primary
Retirement Fund's assets into the Post-Retirement Benefit Enhancement Dedicated TnlSt
Fund.
Committee Action: Accepted for further study.
Statutorily require that the Retirement Board contract for an investigation of the
mortality, disability, service and other experiences of the members and employers
participating in the Arizona State Retirement System as ofthe year ended June 30, 1991;
and that such experience investigation be conducted at least every four years thereafter;
and funds should be appropriated for this purpose to be paid from the Administration
Account of the Arizona State Retirement System.
Committee Action: Adopted, but amended to instead require such a study be done every
five years.
Statutorily require that when the effect of a change in the actuarial assumptions used
for the annual actuarial valuation of the Arizona State Retirement System causes the
contribution rate to change by more than +/- 30% of itself, that the Legislature, in
cooperation with the Retirement Board, commission an independent actuarial review of
the most recent experience study and actuarial valuation with the objective of validating
the changes in the actuarial assumptions; and funds should be appropriated for this
purpose to be paid from the Administration Account of the Arizona State Retirement
System.
Committee Action: Accepted for further study.
Recommendations
Committee Action: Adopted.
Committee Action: Adopted.
Committee Actfon: Accepted for further study.
EXAMINE THE PRESENTINVESTMENTGUIDELINES OF THE SYSTEM
WITH A POLICY GOAL OF PROVIDING FOR ALLOWABLE
INVESTMENTS IN ORDER TO PROVIDE TIMELY PAYMENT'TO THE
SYSTEM'S BENEFICIARIES IN THEIR RETIREMENT
7. Statutorily require that when the effect of a change in the actuarial assumptions used
for the annual actuarial valuation of the Arizona State Retirement System causes the
actuarial accrued liability to change by more than +/- 20% ofitself, that the Legislature,
in cooperation with the Retirement Board, commission an independent actuarial review
of the most recent experience study and actuarial valuation with the objective of
validating the changes in the actuarial assumptions,' and funds should be appropriated
for this purpose to be paid from the Administration Account of the Arizona State
Retirement System.
Committee Action: Adopted.
Committee Action: Adopted, but amended to specify that the limit be increased "up to"
25%.
2. Concu"ent with the statutory implementation of this Report's recommendations,
consideration should be given to complete recodification and simplification ofthe present
retirement statutes.
ITEM 9:
8. Consider conducting an actuarial study to determine the feasibility and cost-effectiveness
of either fully or partially experience rating the contribution rates of the employers
participating in the Arizona State Retirement System; and funds should be appropriated
for this purpose to be paid from the Administration Account of the Arizona State
Retirement System.
1. Consideration should be given to increasing the limit on foreign investments to 25% of
the Arizona State Retirement System's assets, instead ofentirely removing this restriction.
9. Consider conducting an actuarial study to determine the feasibility and cost-effectiveness
of100% employer funding ofthe Arizona State Retirement System, with the initial cost
to convert to this funding approach being paid via eliminating one, or more, of the next
employee pay raises; and funds should be appropriated for this purpose to be paid from
the Administration Account of the Arizona State Retirement System.
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LIST OF AITACHMENTS
Attachment A - Laws 1989, Chapter 310
Attachment B - Study committee minutes of September 18, 1989
Attachment C - Study committee minutes of December 11, 1989
Attachment D - Study committee minutes of January 3, 1990
Attachment E - Study committee minutes of December 5, 1990
Attachment F - Final Report on the Study of the Arizona State Retirement System prepared
by Kaufmann and Goble Associates in association with Cyberserv International
Attachment G - Comments on the Post Retirement Benefit Enhancement Concept prepared by
the Wyatt Company
Attachment H - General Comments on the Kaufmann/Cyberserv Study prepared by the Wyatt
Company
Attachment I - Minority Reports
ATTACHMENT A
AN ACT
RELATING TO PUBLIC OFFICERS AND EMPLOYEES; PRESCRIBING CONDITIONS UNDER
WHICH A SURVIVING DEPENDENT OF ARETIRED MEMBER OF THE STATE RETIREMENT
SYSTEM MAY CONTINUE TO OBTAIN GROUP HEALTH AND ACCIDENT COVERAG~
PRESCRIBING ELIGIBILITY OF UNIVERSITY EMPLOYEES FOR HEALTH AND ACCIDE~
INSURANCE; PRESCRIBING CHANGE IN CALCULATION OF TOTAL EMPLOYE~
CONTRIBUTION TO RETIREMENT PLAN; PRESCRIBING DUTIES OF THE DEPARTMENT OF
ADMINISTRATION; PRESCRIBING DEFINITIONS; PRESCRIBING PAYMENT OF GROUP
HEALTH AND ACCIDENT INSURANCE PREMIUMS FROM THE STATE RETIREMENT PLAN;
PRESCRIBING CREDIT FOR MILITARY SERVICE; PRESCRIBING CHANGE IN CALCULATION
OF EMPLOYER CONTRIBUTIONS TO ELECTED OFFICIALS' RETIREMENT PLAN;
PRESCRIBING CHANGE IN EMPLOYER AND EMPLOYEE CONTRIBUTIONS TO THE PUBLIC
SAFETY PERSONNEL RETIREMENT PLAN; PRESCRIBING REINSTATEMENT OF SURVIVING
SPOUSES' PENSIONS PREVIOUSLY TERMINATED BY REMARRIAGE; PRESCRIBING PAYMENT
AMOUNTS; PROVIDING FOR TRANSFER OF CREDITED SERVICE BETWEEN RETIREMENT
FUNDS UPON CHANGE OF EMPLOYMENT; PROVIDING ANNUAL BENEFIT INCREASES FOR
EMPLOYEES ON PERMANENT DISABILITY; PRESCRIBING PAYMENT OF GROUP HEALTH
INSURANCE FOR MEMBERS, SURVIVORS, AND DEPENDENTS; PRESCRIBING ELIGIBILITY
FOR ANORMAL RETIREMENT PENSION FOR' MEMBERS OF THE CORRECTIONS OFFICER
RETIREMENT PLAN; PRESCRIBING CERTAIN EMPLOYER AND MEMBER CONTRIBUTIONS TO
THE CORRECTIONS OFFICER RETIREMENT PLAN; PRESCRIBING RECALCULATION OF
BENEFITS OF CERTAIN MEMBERS OF THE ARIZONA STATE RETIREMENT PLAN WHO
RETIRED BEFORE ACERTAIN DATE AND RECALCULATION OF THE BENEFIT PAYMENTS TO
MEMBERS AND BENEFICIARIES; PRESCRIBING APERMANENT BENEFIT INCREASE OF TWO
PER CENT OF THE BASE BENEFITS FOR PERSONS RECEIVING RETIREMENT BENEFITS ON
OR BEFORE ACERTAIN DATE; PRESCRIBING RETROACTIVE TAX BENEFIT EQUITY
ALLOWANCES; PRESCRIBING NORMAL RETIREMENT BENEFIT AMOUNT; PRESCRIBING
REDUCTION IN STATE AID TO SCHOOLS; ESTABLISHING A LEGISLATIVE COUNCIL
STUDY COMMITTEE ON THE STATE RETIREMENT SYSTEM; PRESCRIBING MEMBERS,
PURPOSE, REIMBURSEMENT OF EXPENSES, STAFFING, AND A REPORT; PRESCRIBING
LEGISLATIVE REIMBURSEMENT TO STATE RETIREMENT SYSTEM; PRESCRIBING
AUTOMATIC TRANSFER OF CERTAIN EMPLOYEES FROM THE ARIZONA STATE RETIREMENT
SYSTEM TO THE CORRECTIONS OFFICER RETIREMENT PLAN; PROVIDING FOR
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State of Arizona
Senate
Thirty-ninth Legislature
First Regular Session
1989
Conference Engrossed
ISSUED BY
JIM SHUMWAY
SECIEYAlY OF STATE
Chapter 310
SENATE BILL 1129
S.B. 1129
EXCEPTIONS; PROVIDING FOR TRANSFER OF ASSETS FROM THE ARIZONA STATE
RETIREMENT SYSTEM TO THE CORRECTIONS OFFICER RETIREMENT PLAN; MAKING
TECHNICAL CORRECTIONS; REIMBURSING AN ACCOUNT FOR CERTAIN AMOUNTS
SUBTRACTED; PRESCRIBING AREPORT; AMENDING SECTIONS 38-651.01, 38-781.01,
38-781.05, 38-781.41, 38-810, 38-843, 38-855, 38-856, 38-857, 38-881,
38-885, 38-891 AND 38-901, ARIZONA REVISED STATUTES; AMENDING TITLE 38,
CHAPTER 5, ARTICLE 2.1, ARIZONA REVISED STATUTES, BY ADDING SECTION
38-781.42; AMENDING TITLE 38, CHAPTER 5, ARTICLE 4, ARIZONA REVISED
STATUTES, BY ADDING SECTION 38-846.03; AMENDING TITLE 38, CHAPTER 5,
ARIZONA REVISED STATUTES, BY ADDING ARTICLE 7; PROVIDING FOR CERTAIN
REPEAL, AND PROVIDING FOR CONDITIONAL ENACTMENT.
1 Be it enacted by the Legislature of the State of Arizona:
Sec·. 22. Legislative council study committee on the stat~
retirement system; purpose
A. A legislative council joint study committee on the state
retirement system is established consisting of five public members who are
knowledgeable in public or private retirement systems and are appointed
jointly by the president of the senate and the speaker of the house of
representatives, five members of the senate who are appointed by the
president of the senate and five members of the house of representatives
who are appointed by the speaker of the house of representatives. The
president of the senate and the speaker of the house of representatives
shall each appoint one member of the committee as cochairman.
B. The committee shall evaluate the state retirement system and its
structure, operation and accomplishments. In particular, the committee
shall examine:
1. The current benefit structure of the system and compare it to
those benefits provided by other state retirement systems and private
pension systems.
2. The partial health and accident premium payments authorized for
certain retired members of the Arizona state retirement plan and their
dependents pursuant to Laws 1988, chapter 277, section 3 and Laws 1988,
chapter 307, section 1. The committee shall also examine the effect on
the Arizona state retirement system and current retirees if the benefits
authorized pursuant to those laws were modified or eliminated but replaced
with another benefit program.
3. The sufficiency of the statutes relating to the Arizona state
retirement system and plan and whether or not the existing statutes are
being followed and implemented.
4. The composition, function and effectiveness of the Arizona state
retirement system board and the investment advisory counCil.
S. The policies regarding post-retirement benefit increases for
retired persons. ~
6. The policies regarding early retirement incentives with a
particular examination on the feasibility of implementing a corresponding
actuarial reduction in benefits.
7. Whether the present funding of the Arizona state retirement
system adeQuately ensures that advanced funding of the system is provided
on a sound actuarial basis.
8. The feasibility of reQuiring by legislation or house and senate
rule a reQuirement that all proposed retirement legislation be accompanied
by actuarial cost estimates .produced by an independent actuary responsible
only to the legislature indicating the actuarial assumptions used, the
method used to compute the cost, the potential annual cost rates and the
total additional liability created by the proposal.
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9. Th~ present investment guidelines of the system with a P011Cy
goal of provlding for allowable investments in order to provide timely
payment to the system's beneficiaries in their retirement.
10. The implications on continuing the state tax exempt status on
pensions received by retired members of the Arizona state retirement
system.
11. The feasibility of increasing benefits to future retirees to
hold them harmless as a result of taxing the benefits they receive on
retirement.
12. Any other areas the committee determines is necessary in order
to properly evaluate the Arizona state retirement system.
C. Members of the committee are not eligible to receive
compensation but are eligible for reimbursement for expenses pursuant to
title 38, chapter 4, article 2, Arizona Revised Statutes.
D. The committee shall provide a report of its findings and any
recommendations to the president of the senate and the speaker of the
house of representatives on or before December 31, 1989.
E. The staff and the actuary employed by the Arizona state
retirement system shall provide the committee with any necessary technical
services. The committee may use personnel employed by the legislative
council for necessary technical, administrative and operational services
and, with the approval of the legislative counCil, may hire consultants
for technical or legal services as necessary from monies appropriated to
the legislative council. The legislature sha~l appropriate necessary
monies to reimburse the legislative council for the hiring of the
consultants from the Arizona state retirement system fund.
(SECTION 22 OF LAWS 1989, CHAPTER 310 ONLY)
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Attachment B
Study committee minutes
of
September 18, 1989
ATTACHMENT B
RICHARD SMITH, Chairman of the Department of Fi nance at Ari zona State
University, stated he was involved in a market valuation study of the
State Retirement Plan last spring.
MINUTES OF
THE LEGISLATIVE COUNCIL STUDY COMMITTEE
TO EVALUATE THE STATE RETIREMENT SYSTEM
Senator Jeff Hill
Senator Jones Osborn
Senator A.V. "Bill" Hardt
MEMBERS PRESENT:
MEMBERS EXCUSED:
Lowell Sutton
Alan Maguire
Ri chard Smith
Will i am Ad1er
Speaker Jane Dee Hull, Co-chair
Representative Nancy Wessel
Representative Susan Gerard
DATE: Monday, September 18, 1989
PLACE: House Hearing Room #3
The meeting was called to order at 9:40 a.m. by Speaker Hull, Co-chair,
and roll call was taken:
Senator Doug Todd, Co-chair
Senator John Mawhinney
Representative Carmen Cajero
Darrell Guy
Mrs. Hull asked the private sector members of the Committee to introduce
themselves and give their backgrounds:
WILLIAM ADLER, an insurance agent with New York Life, stated he works in
the pre-retirement planning area and spent a great amount of time working
with people in State Retirement as a consultant.
LOWELL SUTTON said he had worked in the retirement area for 40 years in
Arizona and South Dakota. Now retired, he was the former Administrator
for the Public Safety Personnel Retirement System, the Judges' System and
the Elected Officials' System for 18 years.
ALAN MAGUIRE explained he was formerly the active employee on the State
Retirement Board and Deputy State Treasurer for Arizona. He is currently
working for Rauscher, Pierce, Refsnes, Inc., an investment banking firm.
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MINUTES OF LEGISLATIVE COUNCIL STUDY
COMMITTEE TO EVALUATE THE STATE
RETIREMENT SYSTEM
Monday, September 18, 1989
Page 2
Mrs. Hull explained that DARRELL GUY is President of the Arizona Education
Association.
Mrs. Hull stated the following areas the Committee would be considering:
1. Maximizing Benefits - how to best invest Retirement System monies.
2. Permanent COLA - one that would not bankrupt the System, perhaps
patterning it after the Public Safety System.
3. Sufficiency of the Statutes - statutes need to be recodified and
rewritten.
4. Board Membership, Powers and Duties - review the Legislative Council
Study of 1983.
5. State's 5-Year Contribution - how it affects the Retirement System.
6. Davis Michigan Case - what to do for future State retirees in light of
that decision.
7. Health insurance.
8. DOC Transfer to Separate Retirement Group - lack of health benefits.
Mrs. Hull introduced Senator Webster from Missouri, who was in attendance
to learn more about the Arizona Retirement System.
MICHAEL CARTER, an Actuary with the Wyatt Company, presented an Analysis
of the Arizona State Retirement System Spendable Income (copy filed with
original minutes). He explained how the Arizona System stands relative to
other public and private sector systems.
Mr. Carter explained that the Spendable Income Analysis compares the
spendable income of a retiree after retirement with the income that member
was receiving before retirement, to determine how well a retirement plan
is providing benefits to its members. He stated the factors used in
determining pre-retirement spendable income are the social security tax,
federal tax, state contributions and tax, work-related expenses, and
personal savings.
Mr. Carter pointed out that the Arizona Retirement System does not have an
automatic cost-of-living increase like some states, but rather depends
upon the Legislature to provide increases. The only inflation protection
the retiree has is provided by Social Security.
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MINUTES OF LEGISLATIVE COUNCIL STUDY
COMMITTEE TO EVALUATE THE STATE
RETIREMENT SYSTEM
Monday, September 18, 1989
Page 3
Richard Smith inquired whether the Analysis considered a married couple
situation in addition to a single individual because the cost adjustments
would be higher as a result of reducing a married couples' child rearing
expenses. Mr. Carter explained that the retiring employee would have
already adjusted their life style before retiring.
Regarding private savings, Mr. Smith noted they were taken out before
spendable income in figuring the pre-retirement spendable income but
nothing was factored back in for the post-retirement figure. Mr. Carter
explained it would typically be assumed they would cover post-retirement
medical expenses.
Representat i ve Evans asked if the graphs were based on projected un i t
credits. Mr. Carter stated there was no relevance in terms of the
benefits being delivered because the contribution level does not impact
the level of the benefits, however the reverse is true.
Mr. Adler asked what the impact would be since he assumed the report was
based on option 1, which is the maximum benefit under the Plan and did
not take into consideration any of the other six options. Mr. Carter
confirmed option 1 was used because in typically doing a spendable
analysis you look at what the normal option would be. Mr. Adler said he
would disagree and the dollar amount could range from 15% to 20% less.
In response to Speaker Hull, Mr. Carter expla i ned the study was not
prepared with any preconceived notion. He said the System inquired and
he had heard that other systems do spendable income analyses from time to
time.
Speaker Hull asked if a past study, instead of a future analysis, wouldn't
show the Legi slat i ve increases of $40.00 to 3% over the 1ast 10 years.
Mr. Carter stated it would be correct that ad hocs would show up and maybe
it wouldn't look as serious, however, ten years ago we were experiencing
double digit inflation and even the ad hoes did not keep up.
Speaker Hull i nqui red what percentage of working income ret i rement is
based on. Mr. Carter stated the figure used most often is 70% of gross
pre-retirement income.
Mr. Carter explained that the average retiree today receives $25,000 per
year, has 22 to 26 years of service and is 62 years of age. He said
there are also a number of people retiring with less than $25,000 income
and less than 25 years of service.
Mr. Carter explained that the Arizona Retirement System is a defined
benefit system and an individual takes a reduction in benefits if they
retire early.
MINUTES OF LEGISLATIVE COUNCIL STUDY
COMMITTEE TO EVALUATE THE STATE
RETIREMENT SYSTEM
Monday, September 18, 1989
Page 4
Mr. Carter, in reviewing the charts contained in the Wisconsin Report,
exp1ai ned that pri vate sector ret i rement benefi ts in general are lower
than the publ ic sector because private sector plans are generally non­contributory,
the cost being totally the obligation of the employer. He
poi nted out another reason for lower benefi ts in the pri vate sector is
that you would typically expect higher pay in the private sector while the
public sector employee makes less money but is provided more security in
post-retirement years.
Representative Evans noted a number of states were using investment
experience and inquired whether a projected 8% investment which realized a
10% return would net a 2% adjustment. Mr. Carter responded if the actual
investment return exceeded the assumed investment return, yes it could be
used to provide benefits or to decrease the contribution rate.
Mr. Adler asked if there were any states that vest. Mr. Carter explained
in the Ari zona program, as is typi ca1 wi th other states, fi ve or more
years of service are considered vested and may draw a retirement benefit.
If the employee elects to withdraw, they are forfeiting the state-provided
benefit. He said most private sector plans have al so moved to as-year
vesting provision.
ED GALLISON, Di rector of the State Retirement Syst., exp1ai ned how the
Arizona State Retirement System operates and compares to other states.
He referenced the Wisconsin Study (filed with original minutes) as being
right to the point. He explained the purpose of a retirement system is to
attract competent employees to the public sector. He explained the
handout entitled Section L - Statistical Tables (filed with original
minutes).
Mr. Gallison stated the State Retirement agenda was as follows:
1. Automatic COLA (cost of living adjustment) - it is the biggest gap
between Arizona's System and others around the country.
2. Equity in the System - retirees feel the Legislature went back on a
promise.
3. Health Insurance - consideration of the ten-year eligibility provision.
4. Administration of Retiree Insurance - look at effectiveness from the
retirees perspective.
5. Davis/Michigan Case - assure future retirees an equal increase.
6. Funding - problem with volatility in contribution rates; look at
vested employee contribution rate.
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MINUTES OF LEGISLATIVE COUNCIL STUDY
COMMITTEE TO EVALUATE THE STATE
RETIREMENT SYSTEM
Monday, September 18, 1989
Page 5
7. Investment Adv;sory Council - they would like to make a presentation
before the Committee regarding amendments to the statutes on removal of
restrictions on certain assets.
8. Indemnification of Council Members - 1iabi1 ity problem; consider how
other states address it.
9. Procurement Code - possible exemption.
Mr. Ga11ison, in summary, stated that as far as benefits go, Arizona does
not compare favorably with other states, however, looking at the
contribution rate as compares to other states, it's a bargain. He
stressed that retirees do not like change; they want consistency.
Representative Gerard questioned how many "double-dippers" the Arizona
Retirement System had. Mr. Ga11ison said they did not have any figures,
but thought it was a small percentage.
Representative Evans inquired if all of the inequities within the System
had been taken care of in regard to people who fell through the cracks.
Mr. Ga11ison said all of the extreme cases had been but there were other
problems they don't know how to address because of the differences in
when they retired, their base salary, and their age when they retired.
Senator Osborn, with respect to the COLA, questioned whether any
characteristics had been developed to initiate it. Mr. Ga11ison said they
had not settled on any formula which would be appropriate but they had
done cost analyses in the past on' some types of COLAs. His personal
preference would be to see an actuarial funded plan.
Representative Wessel asked if there were any figures available on how
many people opted for early retirement. Mr. Ga11ison said they are still
count i ng, but he woul d guess by the end of the wi ndow, November 15,
between 3,500 and 4,000 would retire out of 8,500 eligible. In response
to Representative Wessel, he added that the majority of them were school
teachers.
Senator Hardt asked Mr. Gallison if he had changed his mind about the
fi xed contri but ion. Mr . Gall i son responded he hadn't but thought it
presented problems because when politics are involved with contributions,
rates change.
Senator Osborn stated that most of the State's ad hoc changes had been in
the area of benefit increases. He questioned how the employee
contri but i on rate woul d be affected if a11 of those were dropped and a
MINUTES OF LEGISLATIVE COUNCIL STUDY
CotItITTEE TO EVALUATE THE STATE
RETIREMENT SYSTEM
Monday, September 18, 1989
Page 6
permanent actuarial funded COLA were i nst i tuted. Mr. Gall i son stated it
would basically be experience related because you would see just the
types of changes that would take you from last year's rate to this year's
rate.
Speaker Hull thanked staff for the information they had compiled for the
Committee members and said they would be sending Committee members the ASU
study and the Legislative Council study. She told the members to call her
office with anything they wanted included on the next agenda.
DR. ROBERT J. LETSON, Legislative Chai~n of CARE (Coalition of Active
and Retired Employees) expressed the follOWing concerns of the CARE Board:
1. COLA - need to address equity of the Plan and System.
2. Health Insurance - strongly support the continuation of the benefit
for employees and dependents as it was passed.
3. Tax Equity 3% Provision - feel the provision of law contained in the
ret i rement sect ion was a contractual agreement that thei r benefits
would not be taxed.
4. Integrity of the System - want the Legislature to maintain an actuarial
required rate, whatever that might be.
DOROTHY KRAUSE, President APEA/AFSCME, representing the AFSCME Retirees,
expressed the follOWing concerns:
1. Opposed to allowing the Legislature to simply remove funds as if they
were a savings and loan association.
2. Need escalator for retirees with more than 45 years credited service,
which Legislature did not enact last year.
3. Need annual automatic increases. Twenty states have a cost-of-living
adjustment built into the System.
4. Institute a 3% hold harmless clause for all persons employed before
September, 1989 who subsequently retire, to fulfill what they believe
is the state's contractual agreement.
5. Normal retirement should be reduced to 85.
6. Correctional officers must have parity in the 3% hold harmless and
health insurance benefits.
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MINUTES OF LEGISLATIVE COUNCIL STUDY
COMMITTEE TO EVALUATE THE STATE
RETIREMENT SYSTEM
Monday, September 18, 1989
Page 7
7. Juvenile Corrections employees must be properly covered by their
current retirement system when the Department of Corrections splits in
1990.
8. Turn accumulated unused sick leave into retirement service credit.
9. Employee contribution to Retirement System must be at a fixed fair
level.
Representat i ve Wessel quest ioned Ms. Krause I s rat i ona1e for want i ng to
reduce normal retirement to 85. Ms. Krause responded it would give those
people who have put in the time the benefit of retiring and give employers
the opportunity to replace higher pay level employees with people at a
lower pay scale. Mrs. Wessel poi nted out that employees want to work
longer these days.
Speaker Hull adjourned the meeting at 12:00 noon.
Ros tta B. Cutty
Committee Secretary
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Attachment C
Study committee minutes
of
December 11, 1989
ATTACHMENT C
Minutes of the
LEGISLATIVE COUNCIL STUDY COMMITTEE
TO EVALUATE THE STATE RETIREMENT SYSTEM
Representative Cajero
Representative Evans
Representative Gerard
Representative Wessel
Co-chairman Hull
Others Present
Members Absent
Members Present
Senator Osborn
Senator Hardt
Co-chairman Todd
Wi 11 iam Adl er
Darrell Guy
Alan Maguire
Richard Smith
Senator Hill
Senator Mawhinney
Lowe11 Sutton
The meeting of the Legislative Council Study Committee to evaluate the State
Retirement System was called to order at 9:45 a.m. by Co-chairman Todd.
Page 5, the fourth paragraph, line 2, strike "not"
Page 6, in the paragraph numbered "5", strike "85" and insert "80"
December 11, 1989
Senate Hearing Room 2
Speaker Hull made a motion that the minutes of September 18, 1989 be approved
as corrected. Representative Wessel seconded the motion. The motion carried.
Edwin C. Gallison, Director, Arizona State Retirement System, gave the
legislative history and background of the retiree medical insurance program.
Mr. Gallison stated that in 1988, S8 1235 was introduced as a "$35 across the
board participation" in group health insurance plans, with a benefit to be
provided from the retirement fund for retirees with ten or more creditable years
of service in the pla~. Also introduced in the House of Representatives was a
companion bill to S8 1235. Mr. Gallison explained that during this time, the
Department of Administration (DOA) was receiving bids for group insurance plans
The following corrections were made to the minutes for the meeting of September
18, 1989:
(See attached sign-in sheet)
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which allowed retired State employees to participate at their own cost, however,
DOA found they were experiencing drastic rate increases, especially from the
indemnity carriers. Mr. Gallison gave the Committee examples of the rate
increases. In regard to these increases, Mr. Gallison further explained the
ramifications for the retirees. As a result, S8 1235 was amended and passed
the Legislature containing the provisions that a single under 65 benefit would
be $95 a month and a single benefit would be 565 a month.
Mr. Gallison further explained that with the passage of S8 1235 (Laws 1988,
Chapter 277), it was understood they woul d be looking at that "fami 1y of
insurance carriers" that the State had contracted with to also provide insurance
for other retired members of ASRS. Mr. Gallison said in addition to the passage
of S8 1235, H8 2143 was introduced that provided assistance for financing
premi ums for dependents. Mr. Gall i son gave the fi gures for the compani on
benefits and stated that the benefits were designed to "hold harmless" the
retirees from the rapidly increasing health insurance premiums. After the
passage of H8 2143 (Laws 1988, Chapter 307), DOA assumed they would contact
those carriers and there would be an open enrollment period with an effective
date of January 1989. Mr. Gallison informed the Committee that the carriers
responded to DOA with "no way." Mr. Gallison stressed that since DOA was
mandated by legislation to provide a plan, the premium structure had to be
redesigned and a bidding process put in place to select a carrier. Mr. Gallison
testified that finally a carrier was selected by mid-October, which left very
little time to provide information on open enrollment to the retirees.
Mr. Gallison stated that as of November 19, out of nearly 35,000 retired members
and their beneficiaries, there are 25,800 that are el igible for the health
insurance benefits. Mr. Gallison pointed out that in addition to the DOA plan,
the ASRS will pay the benefits if a member is eligible to participate in a former
employer's group plan. Mr. Gallison informed the Committee there are 4,078
members that are participating and that are also eligible for other plans and
10,300 participating through DOA. Mr. Gallison noted that these are not all FHP
participants, but also those that are retired State employees and continue to
participate in the other plans in which they are eligible. Mr. Gallison
concluded that in total, the ASRS is paying a benefit for 14,380 retirees out
of 25,802 eligible retirees. Mr. Gallison emphasized that this does not include
any activity from the open enrollment period they are experiencing right now.
Mr. Gallison estimated there are 67 per cent of those eligible receiving benefits
from the legislation and roughly 6,000 that are in the category with five to nine
years of service and feel they have vested rights after five years of service.
Mr. Gallison stated the cost of prorating the benefit for the five to nine year
category would be relatively low. Mr. Gallison informed the Committee that this
leaves only 500 retirees that are not eligible for some assistance in their
health benefits. Mr. Gallison emphasized that the plan enacted by Arizona is
the envy of other States.
Mr. Gallison further informed the Committee that the cost actuarially to fund
the plan for this year was less than four-tenths of one per cent for both the
employee and employer and for next year it will be less than three-tenths of one
Legislative Council StudY Committee
to Evaluate the State Retirement System
December 11, 1989
Page 2
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Page 3
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Legislative Council Study Committee
to Evaluate the State Retirement System
December 11, 1989
per cent. Mr. Gallison concluded that ASRS is presently paying almost $1.5
million per month for those participating in other employer plans and almost $1
million per month for those participating through DOA.
In response to Senator Todd's questions, Mr. Gallison explained that ASRS is
basically both a payroll service/funding agent. Mr. Gallison stated that for
those participating in other plans, the ASRS pay those employers the appropriate
amounts toward their participants' medical costs. For participants covered
through DOA, the ASRS withholds the difference from retirement checks in addition
to payi ng the amount that is due. Mr. Galli son emphas i zed that ASRS is not
involved in the administration of the insurance contract.
Speaker Hull asked if a check was simply issued to a retiree, would that money
be taxed. Mr. Gallison answered that any time there is a cash benefit, it would
affect a person's income tax.
Representative Cajero questioned Mr. Gallison if the retirees were to receive
a check, would they be free to pick their own carrier. Mr. Gallison answered
that the representatives from FHP would have to answer that, but it was his
opinion that this would dilute the entire underwriting process.
Discussion ensued regarding the prorating of benefits for the approximately 6,000
retirees who are vested with five to nine years of service. Mr. Gallison stated
that the cost would be six one-hundredths of one per cent, for a total of nine
one-hundredths of one per cent.
Regarding the 4,000 members that Mr. Gallison testified were being paid through
their former employers, Mr. Adler asked if that was a trend that appeared to be
decreasing as far as employer participation and their payments are concerned.
Mr. Gallison answered that the numbers have been increasing as new retirees enter
the eligibility field, but he sees the trend reversing because those employers
are becoming more reluctant to cover retirees.
Cathy McGonigle, Assistant Director, Personnel Division, Department of
Administration, testified to the Committee that the role of DOA is to procure
the insurance coverage and to administer it at affordable rates. Ms. McGonigle
informed the Committee that the number of retirees has increased in the plan from
2,000 to approximately 15,000 State retirees and their dependents. Ms. McGonigle
stated that this year the open enrollment process was easier, because of advance
planning. Ms. McGonigle gave information on a consumer awareness committee that
has been established to meet with FHP. In regard to retirees being provided the
money or subsidy to enable them to chose their own insurance carrier, Ms.
McGonigle stressed that from DOA's perspective the viability of the program needs
to be considered.
In response to Senator Todd's questions, Ms. McGonigle stated that FHP did the
majority of the work on the open enrollment publicity program, but it was a
collaborative effort with DOA and ASRS.
Mr. Bodaken noted that the rate increase that FHP offered for the ret i ree
program, effective January 1, 1989 was only 11 per cent and that is well below
other insurers. Mr. Bodaken pointed out to the Committee that FHP was the only
company willing to bid on both the under age 65 early retirees as well as the
over 65 population and without this program, many retirees would have a difficult
time finding insurance at a reasonable rate. Mr. Bodaken concluded that FHP was
committed to the State of Arizona retiree program and stressed the importance
of continued cooperation between FHP, ASRS, DOA and the Legislature.
Discussion ensued between Senator Osborn and Mr. Bodaken regarding underwriting
insurance for large groups. Senator Osborn commented that he had the impression
from Mr. Bodaken's testimony that the larger the group for underwriting, the
lower the rates would be. Mr. Bodaken explained that their largest group is the
Medicare risk group,but FHP receives reimbursement for this program from the
Federal government, and although Arizona's retiree program was their largest
account in Arizona, at this time there was not enough experience with this
account to give an accurate answer to Senator Osborn's questions.
Bruce Bodaken, Regional Vice President, FHP, Inc., reviewed the background of
FHP and their involvement with the retiree program. Mr. Bodaken testified that
FHP Health Care is one of the largest federally qualified health maintenance
organizations in the United States and was founded in Long Beach, California in
1961 and now has over 500,000 members. Mr. Bodaken informed the Committee that
in 1982 Medicare selected FHP to be the first HMO in California to offer an
alternative to traditional Medicare through a Medicare risk contract with the
Federal government - called the FHP Senior Plan. Mr. Bodaken stated that FHP
came to Arizona in 1985, and now Arizona has a membership of nearly 60,000
members. As a result of Ari zona's most recent open enrollment, there is a
currently a retiree membership of approximately 14,000.
Mr. Bodaken stated that in 1988 FHP responded to the request for proposals issued
by the State for the retiree program. Mr. Bodaken outlined the reasons that FHP
was chosen by the State for the program and di stri buted to the Commi ttee
information on the options that are available to the retirees (Attachment A).
Mr. Bodaken informed the Committee that FHP issued a newsletter to all retirees
to notify them of the open enrollment period and met with thousands of retirees
throughout the state and enrolled over 8,000 retirees.
Mr. Bodaken related the problems that were encountered in 1988 with having only
three weeks to conduct open enrollment for the retirees. Mr. Bodaken stated that
at the request of DOA, the enrollment peri od was extended for two weeks to
further accommodate the retirees. Mr. Bodaken emphasized that FHP and the State
did everything they could within the time frames allowed to assure the retirees
that there was an FHP option which allowed them to stay with their previous
physician, i.e., the indemnity option, but still there was confusion. Mr.
Bodaken informed the Committee that FHP has maintained a close working
relationship with DOA and ASRS and their hard work has paid off. Mr. Bodaken
said that out of a membership base of 14,000 members, only five retirees have
"dropped" from the program.
legislative Council Study Committee
to Evaluate the State Retirement System
December 11, 1989
Page 4
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In response to questions from Representative Cajero, Mr. Bodaken answered that
all hospitals in Pima County will accept FHP reimbursement for the indemnity
option, but on the HMO plan there is a provider list for doctors and hospitals.
Representative Gerard stated that she had the impression from her constituents
that the HMO was the only option available. Mr. Bodaken replied that the HMO
was an easier process, with less paper work to complete.
Speaker Hull made a motion that pursuant to section 38-431.02, subsection 0,
A.R.S., an actual emergency exists and that a meeting be held immediately for
the purpose of considering and making a recommendation regarding the hiring of
a consultant for the Legislative Council Study Committee to Evaluate the State
Retirement System. Representative Wessel seconded the motion.
Senator Todd informed those present that the Committee members were the only ones
that were allowed to ask questions of the Staff and participate in the discussion
as a result of Speaker Hull's motion.
Mr. Adler asked Mr. Bodaken what the effect would be should an option be allowed
for members of the ASRS to opt to have payments made directly or indirectly
through increases in compensation so they can insure themselves with their own
carrier. Mr. Bodaken expressed great concern and stated that each category, over
65 and under 65, would have their own difficulties in obtaining coverage, with
emphasis on the high cost and eligibility problems that would be encountered.
Mr. Adler asked Mr. Bodaken to explain the concept of "adverse selection." Mr.
Bodaken stated that any time you underwrite an insurance product, you "get the
good with the bad" and usually with a large enough account there should be
reasonable rate increases, but if there is a smaller population that is in a
high risk category, it is called "adverse selection." Mr. Bodaken stated that
if a number of ret i rees opted out of the program, wi th the poss i bil ity that those
retirees were the healthiest, that would leave the highest risk retirees in the
account and this would have an impact on the rates or perhaps the insurer's
ability to make the program work.
Representative Wessel asked Mr. Bodaken why the five members out of 14,000 left
the program. Mr. Bodaken answered that two of the five had alternative coverage,
and he would have to obtain the remaining information for her at a later time.
Speaker Hull explained for those present that she would be making a motion for
the Committee to go into a session to discuss the hiring of an actuary. Speaker
Hull stated that the retirement bill allowed for an actuarial study to be
conducted and as the retirement system is extremely complicated to understand,
the Committee felt they could use professional help in evaluating the system.
Speaker Hull added that public testimony would be heard by the Committee after
this session was completed.
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Legislative Council Study Committee
to Evaluate the State Retirement System
December 11, 1989
Page 5
Legislative Council Study Committee Page 6
to Evaluate the State Retirement System
December 11, 1989
Speaker Hull added that the reason this was taking place so quickly was because
the study would be conducted through Legislative Council and the Legislative
Council meeting was scheduled for tomorrow.
The motion carried.
lisa Hardy, House Research Analyst, gave a brief explanation of the procedures
that took place to locate a actuarial firm to conduct the study of the State
retirement system. Ms. Hardy stated that Speaker Hull and Senator Todd met with
several actuaries that were recommended and decided on the firm of Kaufmann &
Goble. Ms. Hardy reviewed for the Committee the firm's qualifications.
Ms. Hardy briefed the Committee on the proposal received from Kaufmann &Goble
and stated that it corresponded to the items that are set forth in S8 1129 (Laws
1988, Chapter 310), except for items 2, 10 and 11.
Senator Todd said that one of the goals of the study was to compare Arizona's
retirement system to other systems and Kaufmann & Goble, among other
qualifications, have a broad background in that area.
Mr. Adler pointed out that since the Committee was scheduled for sunset at the
end of this month and given the amount of money involved for the study, should
the Committee's actions be contingent on the Committee's extension? Senator
Todd answered that extending the Committee by legislation was the plan, but if
the legislation did not survive, the two respective standing committees that deal
in retirement could benefit from the study. Senator Todd added that the Speaker
of the House of Representatives and Senate President could also name a Committee.
In response to questions from Senator Hardt, Speaker Hull stated that two actuary
firms were considered and Kaufmann &Goble had the most impressive credentials
with a willingness to work with legislative staff and the firm would be able to
have information prepared for the Committee by February.
Ms. Hardy informed the Committee that the total cost of the study represented
a 35% reduction from the original proposal from Kaufmann & Goble, which was
originally $87,325 and now is a minimum of $57,820, with a maximum of $64,275.
In response to questions from Representative Cajero, Speaker Hull stated that
th legislation states that any studies were to be conducted through legislative
Council and financed by the retirement system. Speaker Hull added that some of
the concerns of retirees will be addressed by this study and listed 1) the COLA
issue in comparison with other states 2) the early retirement issue and 3)
whether the present funding adequately ensures that there is a sound actuarial
bas is. Speaker Hull stated that a suggest ion has been made to attach an
actuarial statement to legislation if it relates to retirement.
Spealeer Hull made a motion that the Study Commi ttee to Evaluate the State
Retirement System recommend to Legislative Council that the Committee contract
wi th Kaufmann & Gobl e to perform the actuari a1 worle. Representative Wessel
seconded the motion.
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Legislative Council Study Committee
to Evaluate the State Retirement System
December 11, 1989
Speaker Hull stated that she had been informed that a cap needed to be
established for the study and included in her motion.
Speaker Hull restated her motion that the Study Committee to Evaluate the State
Retirement System recommend to Legislative Council that the Committee contract
with Kaufmann l Goble to perform the actuarial work and that a cap be set at
$57,820. The motion carried.
Senator Todd stated that the Committee would now return to the regular meeting
and public testimony would be heard.
Dr. David Smith, Chairman, Coalition of Active l Retirement Members (ASRS) Care,
testified that his organization supported the current benefit for retirees and
supported expansion to include retirees with five to nine years of service on
a reduced benefit basis.
Marie Galloway, Assistant Finance Director, Payroll Department, Tucson Unified
School District, informed the Committee of the problems her department encounters
with the program. Ms. Galloway stated that there were communication problems
and explained the billing problems the payroll department had to handle.
Senator Todd informed Ms. Galloway that this was significant information that
should be discussed with DOA or FHP.
Dorothy Krause, President APEA/AFSCME Retiree Chapter, testified to the Committee
that she is in favor of providing benefits on a sliding scale to those with five
to ten years of creditable service.
Mrs. G. Leon, a retired educator, distributed to the Committee copies of a Health
Insurance Summary Report (Attachment B). Ms. Leon stated that she was a member
of FHP. Mrs. Leon stated confusion over the operation of the health insurance
premium program through the retirement system.
At the request of Senator Todd, Hattie Blanco, Key Account Executive, FHP,
answered Mrs. Leon's questions. Ms. Blanco stated that FHP markets a product
called a Senior Plan. Ms. Blanco explained that FHP enhances the program from
Medicare. Ms. Blanco said that with the Senior Plan, FHP is paid directly by
the Federal government and is only available in Maricopa and Pima Counties.
Abraham Baum, a State retiree, informed the Committee that he was a State retiree
with seven years creditable service and he felt that the State program was
unfair to the retirees with five to nine years of creditable service. Mr. Baum
emphasized that in regard to funding assistance, all retirees should be treated
fairly.
Mary C. Bishop, representing herself, asked the Committee for information on an
employee who retires when open enrollment is not being held. Mrs. Bishop was
informed that when an employee retires it automatically makes that employee
eligible for the retirement program.
The meeting adjourned at 11:50 a.m.
(Attachments on file with original minutes)
Respectfully submitted,
~~~~~
Charmion Billingt~n, Se~r1tary
Representative Cajero asked if the members from the old system received one more
check per year than the new system retirees. Professor Kasmier stated that he
did not know at this time. Senator Todd stated that the Committee would ask Mr.
Gallison to answer that at a later time.
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Page 8
Professor Leonard Kazmier, College of Business, Arizona State University,
distributed to the Committee a Position Paper (Attachment C). Professor Kazmier
testified on behalf of State employees who were involuntarily transferred from
the old retirement system to the new system on July 1, 1981. Professor Kazmier
informed the Committee that ASRS currently is calculating old-system benefits
based on the reduced account balances, and thereby was depriving the transferred
employees of the legislative commitment that there would be no reduction in
benefits resulting from the mandated transfer. Professor Kazmier suggested a
revised procedure for calculating the benefits under the old system would fulfill
the commitment from HB 2453 (1980).
Representat i ve Evans requested that the Committee and Staff look into the
Department of Corrections (DOC) retirement system and the problems that were
encountered when DOC shifted from the State retirement system to their own plan.
Senator Todd stated that the Committee would try to meet again before the end
of this year to review rough drafts for legislation to be introduced in the next
session.
Legislative Council Study Committee
to Evaluate the State Retirement System
December II, 1989
Hearing Room N0. ~/ ----
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Attachment D
Study committee minutes
of
January 3, 1990
LEGISLATIVE COUNCIL STUDY COMMITTEE
TO EVALUATE THE STATE RETIREMENT SYSTEM
January 3, 1990
Senate Hearing Room 2
Senator Todd, Co-chairman, called the meeting to order at 9:40 a.m.
Members Present
Senator Todd explained the procedure to be followed by the Committee members
would be to recommend the continuation of the committee and to prepare a bill
for possible introduction.
Representative Evans stated two additional areas needed to be addressed: the 5
to 9 year retirees and the DOC transfer.
&(05 t~~
)-u- e-(.L- !~/CjD
Representative Carmen Cajero
Representative Henry Evans
Representative Susan Gerard
Representative Nancy Wessel
Speaker Jane Dee Hull, Co-chairman
Minutes of
ATTACHMENT D
Members Absent
Senator A.V. "Bill" Hardt
Senator Jeff Hill
Senator Jones Osborn
Senator Doug Todd, Co-chairman
William Adler
Darrell Guy
Alan Maguire
Ri chard Smith
Lowe11 Sutton
Senator John Mawhinney
Others Present
See attached sign-in sheets.
CHRISTOPHER SMITH, Legislative Research 'Analyst, explained the draft final report
(copy filed with original minutes). He added any Committee recommendations
resulting from today's meeting would be included in the final report.
Senator Osborn questioned section 1.2. regarding the effect on the Retirement
System of modifying or eliminating benefits. He stated he did not understand
the "but" and asked if it was being added as one of the options. Christopher
Smith explained the language was taken directly from S.B. 1129 and was the order
the committee was charged with. He added there were discussions last year in
the conference committee about perhaps eliminating the health insurance premium
subsidy, however he explained you cannot take away a benefit without consent.
He concluded this is a discussion of replacing those benefits with equivalent
benefits.
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LEGISLATIVE COUNCIL STUDY COMMITTEE
TO EVALUATE STATE RETIREMENT SYSTEM
January 3, 1990
Page 2
Representative Evans moved that staff be instructed to prepare legislation to
include on a sliding scale the 5 to 9 year retirees for supplemental medical
benefits.
Senator Todd reminded Committee members they were charged with responsibilities
within the Arizona Retirement System and that the Department of Corrections (DOC)
and others were outside the scope of this particular committee in its statutory
charge. He added the Committee has acknowledged that problems exist, but it
woul d be more appropriate for the DOC probl em to be addressed ina pi ece of
legislation separately and not a recommendation from this Committee.
Representative Wessel seconded Mr. Evans' motion.
Mr. Adler pointed out that the Committee members received a letter from a widow
which might fall under this part of the bill regarding extension of benefits.
Representative Evans' motion passed by voice vote.
Speaker Hull explained that she and President Usdane had discussed reappointment
of the Committee until the consultant's report is finished.
Speaker Hull stated they would have staff look at the letter from the widow.
She also explained that the Davis/Michigan Hold Harmless Benefit Increase had
been discussed and the consultants were looking at it and she thought it would
be wise to consider a one-time three percent increase.
Speaker Hull moved that the Committee draft legislation to include the three
percent hold harmless and make it retroactive to September 15, 1989.
Representative Gerard stated concern t,hat the three percent would not allow
retirees to break even and more research needed to be done in this area.
Senator Todd asked that consideration be given to what the hold harmless does
to unfunded liability and added he would have no problem with the Committee
recommending it be included in the proposed legislation for consideration.
Representative Gerard seconded Speaker Hull's motion.
Mr. Adler stated he had reviewed last year's actuarial report and the three
percent adjustment cost approximately $80 million, at a difference of about .41%
on the rate.
Senator Todd stated the average overall cost of living is about 2 1/4% for an
average retiree which does not take into consideration other sources of
retirement income.
Representative Evans emphasized that the Committee should be very careful when
adjusting some of the retiree benefits because of the possibility of people
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LEGISLATIVE COUNCIL STUDY COMMITTEE
TO EVALUATE STATE RETIREMENT SYSTEM
January 3, 1990
Page 3
losing other state benefits because of the increase in income and suggested that
the Retirement Board take a look at those caps.
Senator Hull's motion passed by voice vote.
Representative Gerard asked if there was anything in the proposed report that
addressed the issue of whether or not the Retirement Fund is overfunded. Senator
Todd explained the consultant would be addressing that question in detail.
Christopher Smith explained that the Committee is charged with looking at the
current benefit structure of the System and the consultants will be, without
question, looking at that very carefully. He added there is no question the Fund
is overfunded by actuarial definition, but rather given the actuarial status of
the Fund, there are some who see the potential for increased benefits on one side
and others see the potential for reducing the contribution.
Representative Gerard asked if the issues of valuation methods would be
addressed. Mr. Smith stated there was no doubt in his mind those would be
addressed.
Representative Evans stated he would like the actuary to look at the direct
correlation between the growth of the Plan and the net return on the funds put
in years ago, because the actuarial input today had nothing to do with the
actuarial input years ago.
Senator Todd, in response to Mr. Guy, explained that the recommendations
considered at this meeting are ones that will be in the final report of the
Committee as statutorily composed and the recommendations would then be acted
on by the legislative body. He added the Committee today will finalize the
action of the Committee and its final report, and subject to the action of the
President and Speaker, the Committee would continue in some form.
In response to Senator Hardt, Senator Todd explained the reason for this meeting
is to recommend legislation from those areas we have looked at and need to be
addressed.
LISA HARDY, Legisl athe Research Analyst, asked if the Committee wanted the
proposed legislation as an attachment to the final report or merely noted.
Senator Todd asked it be written as an attachment.
Senator Todd explained that the proposed legislation attached to the final report
would be in rough draft form.
Speaker Hull noted that she was in possession of the letter Mrs. Dickey wrote
and would give it to staff for review and possible consideration by the
Committee.
ROBERT LETSON, representing CARE/VARA, stated CARE feels all employees should
be granted the three percent, including those operating under the law of tax-
LEGISLATIVE COUNCIL STUDY COMMITTEE
TO EVALUATE STATE RETIREMENT SYSTEM
January 3, 1990
Page 4
exempt provisions. He said the State had passed a three percent tax equity which
was supposedly to be paid by the State of Arizona, but is being paid by all of
the employers and employees who are not going to receive any of the tax equity.
Speaker Hull stated her recommendation was to take care of employees retiring
this year which would be a part of legislation this session. She added that is
a court case and emphasized that the Legislature did not tax retirees, the
federal courts changed the system.
JEAN MANDELL, wife of a retired teacher, stated she sent a letter to the members
of the Committee and would like that letter considered.
Senator Todd thanked all the members of the Committee and stated they would be
called upon again.
Speaker Hull thanked the Committee members and stated the Committee would be
continued until they received the consultant's report.
The meeting adjourned at 10:20 a.m.
submitted,
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Attachment E.
Study committee minutes
of
December 5, 1990
1
Speaker Hull, Cochair, called the meeting to order at 1:45 p.m. in
Hearing Room 2 of the House of Representatives.
MINUTES OF MEETING
LEGISLATIVE COUNCIL STUDY COMMITTEE
TO EVALUATE THE STATE RETIREMENT SYSTEM
December 5, 1990
Speaker Hull gave opening remarks and a brief background of the
Legislative Council Study Committee to Evaluate the State Retirement
System which was provided for by Laws 1989, Chapter 310 to be
comprised of 15 members. She stated the committee held three public
meetings, Le., September 18, 1989, December 11, 1989, January 3, 1990
and this meeting held today, December 5, 1990. She sincerely thanked
the many people who diligently worked on this committee and assisted
the members in gathering badly needed information. The net results of
this meeting would not have been made possible without the assistance
of many, along with their suggestions .and evaluations.
Members absent:
Senator Mawhinney
Senator Hardt
Representative Wessel
Representative Cajero
Senator Osborn
Mr. Sutton
Mr. Maguire
Mr. Smith
Mr. Guy
Mr. Adler
The Speaker then briefly discussed the agenda by stating the first
presentation of the draft report will be given by Sidney Kaufmann of
Kaufmann and Goble Associates and Dr. Corydon Hurtado of Cyberserv
International Co. The Speaker announced there would be an insert to
the agenda. Since the agenda had already been printed, in order to
legally add to the agenda, I will read the following statement which will
appear in the minutes of this meeting: "Pursuant to A.R.S. 38-431.02,
subsection H, Mr. Carter's comments will be expanded to include a
response to the consultants' report, in general, rather than be restricted
to comments on the Postretirement Benefit Enhancement concept." She
stated that Mr. Carter had looked at the report and the committee would
like his comments. She asked for objections. There being none, this
item is added to the agenda.
Members present:
Senator Hill
Representative Gerard
Representative Evans
Senator Todd
Speaker Hull
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The Speaker continued addressing the agenda. After presentations to
the committee there will be public comments, and then there will be
consideration or adoption of recommendations contained in the
consultants' final draft report. At that time, she stated she would like
for the committee to go through these one by one, accept it, amend it,
and accept it as amended, or defeat it. The final motion will be an
adoption of the study committee's report.
The Speaker then recognized Mr. Sidney Kaufmann and Dr. Hurtado
with Kaufmann and Goble Associates and Cyberserv International, Co.
respectively.
I'm Sydney Kaufmann and Dr. Corydon Hurtado is at the overhead
projector. Dr. Hurtado said what he was going to attempt today was to
place their study into perspective as authorized by SB 1129. There
were a number of items requested in that legislation but we were
retained only to address certain of those items: 1, 4, 7 and 9. He stated
they looked at a variety of previous studies and data and would not go
into detail on all items as it is outlined in their report. He continued to
outline where all of their material and computerized data was obtained
and how they incorporated it into their findings.
Dr. Hurtado continued at length to review the overhead projections on
the screen, a copy of which is on file.
Overhead #1 consisted of the cover sheet; #2 related to Study Authority
and Data Collecting Process; #3 - The Study's Overriding Issues; #4 ­Recommendations
Overview; #5 - The Strategic Objectives; #6 ­Strategic
Objectives, continued. Some questions were asked throughout
the presentation, and responded to by Dr. Hurtado - including
overfunding in a few other states, and some review of their programs.
He stated that most of the questions asked are answered in the appendix
report. He encouraged members of the committee to look carefully at all
35 of their recommendations, which contain only 4 Postretirement
Benefit Enhancement Dedicated Trust Fund recommendations. There
are a great number of very important issues addressed in the 31
recommendations and it is hoped the attendees will give some
consideration to them and not focus their attention on Postretirement
Benefit Enhancement alone. Several recommendations have been made
to include in state statutes many very important things:
Definitions - intent of the retirement system - the trust fund nature of
the retirement system - primary funding objectives -to provide a
protective mechanism to the Postretirement Benefit Enhancement
Dedicated Trust Fund itself - and to provide an ongoing mechanism for
providing a better dialogue between the legislature and the retirement
board itself.
2
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The other three strategic objectives were: 1. To bring about a greater
awareness among employees, employers and legislators of the excellence
of the retirement system and its outstanding benefits as compared to
other states. 2. To foster in the overall administration of the retirement
system consideration of concepts of moral obligations to the members ­equity
in-the way in which postretirement benefits are awarded and the
short and long range affordability to the members, employers and
taxpayers of all the retirement plan and benefit enhancements.
3. Market demand and evaluating the need for benefit plan
enhancements and the concept of employing alternative forms of
employee benefit programs to reduce the ultimate taxpayer burden.
Some discussion ensued with reference to the various figures and
statistics that had been given and Mr. Kaufmann clearly stated to the
committee that we do not have final solutions for the committee, we only
have given you our recommendations and a legitimate starting point for
initiating a program and once and for all putting to bed the issue of
how much money is available from the performance of the system to the
high cost of living benefits. $400 million in a 105% ratio is not the final
solution. It was the one we felt comfortable with in making our
recommendations to you. We don't want to imply that this is the only
way of addressing this issue.
Mr. Adler inquired as to what will happen that will no longer require
$400 million (\f overfunding to be available for the fund. And, what
effect will transferring $400 million have on the contribution rate,
because that money will no longer be available? Dr. Hurtado responded
by saying the $400 million of overfunding will have the impact of
removing $400 million from the resources of the retirement system in
terms of providing for the ongoing funding of the benefits that are
mandated by law. There is a question that once that $400 million is
specifically earmarked for retiree benefits it will not be available for any
other purpose other than postretirement benefit enhancements.
Mr. Adler stated that in a recent Wyatt report it indicates that a 5 year
history of the system did not realize overfunding until 1987. Prior to
that there was an underfunding and there was no relation to assets. My
question is, for what reason in your estimation have the actuaries built
in an overfunding situation over the last 3 years and why don't we need
it anymore to the extent we can transfer the money into a separate
fund?
The Speaker stated this is a legislative study and in the end the
decisions will be made by the legislature as to whether they want to
retain overfunding or not. This is a policy decision and we need the
input of this committee but there are approximately 85 more members
of the legislature who have their opinions.
3
Mr. Kaufmann stated we are paying $300 million a year as of June 30,
1989 in retirement benefits. What we tried to do was to make different
scenarios available to give you an idea as to how long we think, within
an acceptable range, we might run that postretirement benefit fund
under different scenarios. Mr. Kaufmann further stated that he would
caution everyone that in looking at the exhibits that give rise to the
summary results that you realize them as not only absolutes but more
as indications of approximately how this fund would work. Certainly it
will change based on the underlying demographics of the system itself,
the rate of new members coming into the system and who subsequently
retire, but we feel this is a legitimate exercise that will enable you, the
audience, and the study group to realize the various impacts of running
down a PRBE at different rates. I can't suggest to you the right
approach. I can suggest to you that my absurd example of 133% COLA
in the first year is not the right approach.
Mr. Evans stated that he had seen a table revealing 29 other states that
have a PBRE, or perhaps it was 29%. Mr. Kaufmann stated his belief
that 29 other states do not have a PRBE. California, however, operates
similarly to our plan. In most states, if they have a COLA, it is most
likely to be automatic. Discussion continued, mostly reiterating previous
points made. Statistics were again reviewed.
Senator Todd was recognized. He asked Dr. Hurtado to comment on the
politics and other aspects of dealing with this matter of ownership of the
overfunded dollars. I believe you attributed this to retiree contributions.
Dr. Hurtado stated he did not have the statistics to be specific, however,
because of salaries going up dramatically it could be that maybe they
didn't contribute as much as the current active members. Discussion
continued. It was suggested that the actuaries take an active part in this
area. Figures were produced based on the actuarial assumptions. Mr.
Sutton stated that the Public Safety retirement actuaries generate this
type of information every 5 years, based on length of service, amount
of contributions, etc. Mr. Kaufmann stated that the Wyatt Company has
published the numbers that relate to the portion of the assets that reflect
retiree contributions, liabilities, employee-employer contributions, roughly
40-30-3~.
Speaker Hull inquired how many states' retirement funds are in serious
trouble besides the state of Massachusetts, how many states' retirement
funds are now being totally funded by state contributions because there
is no money to payout benefits and of those states how many of those
states have COLAS. Dr. Hurtado stated this information is contained in
Appendix 2 and he will collate the information for her.
4
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Mr. Kaufmann was recognized. He stated he is trying to get some kind
of comparison between the cost of getting the PRBE dedicated trust fund
started and the cost for a more traditional permanent automatic type of
COLA. He referred the members to Figure 4 on the 4th page following
page 31, to an overhead which showed data creating this draft and
information derived from the Wyatt study report projecting the cost for
the 3.5% capped COLA being provided every 2 or 3 years projected
through the year 2013. He continued to discuss these numbers and
figures.
The Speaker asked Mr. Kaufmann if he would once again go over some
of the findings and legislative recommendations and then have Mr.
Carter speak. She specifically wanted him to review the purpose behind
the fund, which is not legislatively addressed. Mr. Kaufmann said one
of the things they have attempted to do with the recommendations in
Figures 1, 3 and 4 is to provide a frame of reference within which the
retirement system is administered and in which the benefit
enhancements are awarded. Figure 1 statements put into focus really
what is the purpose of the retirement system - what it is supposed to
achieve. Figure 2 focuses attention on the primary funding objectives of
the retirement system and Figure 3 defines the retirement system
properly as a trust fund, and incorporates the definition into state
statutes. Dr. Hurtado added additional comments defining the three
items more explicitly. It is felt that state employees should be
encouraged by the retirement system to complete a full 30-year service
career and discourage early retirement and to encourage extended
emplOYment. We believe the flSCalliability of the retirement fund in the
long run is attendant and closely aligned to career retirement. He then
discussed years of service compared to how much retirement
compensation is received, etc. Many concepts of this subject were
discussed, Le., social security, etc. He continued discussing Figures 2 and
3 at length.
Mr. Kaufmann stated that what is contained in the above referenced
subjects is not earmarked toward one constituency or another. It is
viewed from the standpoint of what overall will provide something
reasonable to active employees measured against retired employees,
understanding that in any retirement system there is no equity. Nothing
is fair in a retirement system.
The Speaker then stated that the committee will go over all of the
recommendations that have been discussed. Some are simple and
understandable, others are controversial. Later on during the meeting
each item will be gone over thoroughly again and if there is agreement
they will be accepted. If not, a vote will be taken and any disagreements
will be entered.
5
The Speaker then recognized Mr. Carter of the Wyatt Company who
gave two presentations - one regarding the enhanced benefits and one on
the whole consultants' report. The Speaker stated that for purposes of
legality in rules, we do have a quorum present therefore this committee
can vote on the proposed recommendations.
Mr. Carter addressed the committee and stated he welcomed the
opportunity to return to Arizona - he loves our state. Concerning the
PRBE concepts, he referred to the report that was presented to the
ASRS Board on November 16th. The PRBE concept is a funding
methodology to provide future nonguaranteed cost of living adjustments.
Reference nonguaranteed, from a member's viewpoint, a permanent
guaranteed COLA is definitely the preferred approach and this provides
nonguaranteed COLAS and there is a funding impact on the ASRS. In
essence, the program would transfer, actuarial gains would transfer
investment gains from the main plan to the PRBE account whenever this
105% ratio is exceeded. This means the regular contribution rate to the
ASRS will not decrease as it has in the past due to favorable experience.
Therefore the PRBE process is not a free ride and is not a no cost item.
He stated that the ability to grant future benefit improvements in the
ASRS will be impaired by the transfer mechanism since those gains have
been transferred out of the main account. The full cost of that change
will have to be absorbed through changes in the contribution rate.
Mr. Carter said they did do some calculations as to what impact this
initial $400 million transfer would cause under the current funding
provisions, the statutory provisions of the ASRS. The contribution rate
would be about 1% higher after the transfer of the $400 million. It
would be about a 25-28% increase in the contribution rate. If this
committee approves the PRBE concept and legislation is drafted, there
are several items that we believe need to be clarified in the statutes. He
stated that the definition of the actuarial value funding ratio (105%)
criteria, needs to be defmed by statute. If the 70% concept is included,
then gross income needs to be tied down. Does gross income mean
interest in dividends only or does it include realized gains? On the fIXed
income side, what about the accrual of discount and the amortization of
premium in the bond purchase price? These need to be clarified so there
is no misunderstanding.
Mr. Evans inquired of Mr. Carter about the portfolio transferring the
$400 million. If, for some reason, those stocks or whatever jump up to
$500 million we will have to determine what is going to be distributed ­the
actual gross income and not the increase in that particular portfolio,
is that correct?
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Mr. Carter responded by saying ''Yes, this is my point." The statutes
need to be clarified and clearly indicate what is meant by gross income.
Does that include realized gains, unrealized gains and unrealized losses?
If legislation is drafted, those types of issues will need to be addressed.
Senator Todd said that should a system similar to the PRBE follow our
actions here, some definitions of what needs to be included and excluded
in the computations certainly should be part of this statute.
Some discussion continued. Mr. Carter referred to the projections in
Appendix 10. The fund would not be depleted in 23 years and the
annual payout would exceed 70% of the income of that fund. Mr. Carter
continued with statistics from the report. Mr. Carter stated that a
question arose as they read the report. If the intent is that the
investment be primarily fixed income in nature, that system employees
would be folded into the PRBE account, then the Legislative Council
should be encouraged to look at the legal constraints involved as the
system retirees do have certain guarantees.
Senator Todd advised Mr. Carter this is the subject of considerable
discussion right now between myself, staff, attorney general's office, etc.
Mr. Carter stated that they would encourage only one trust fund with
separate accounting. Mr. Kaufmann and Dr. Hurtado concurred with
this recommendation.
Senator Todd referred to a statement made by Mr. Carter of the future
benefit improvement. Assuming that something like this is going to
come about, you said "Future benefit improvements in the ASRS may
become almost impossible due to interaction of PRBE funding
mechanism, etc." He asked for the reasoning behind the statement.
Some discussion continued between Senator Todd and Mr. Carter. Some
examples were discussed, i.e. health insurance premium supplement,
implemented by the legislature two sessions ago. This supplement
extended that availability to people who have retired with 5-9 years of
service.
Mr. Adler inquired of Mr. Carter about a study made concerning the
possibility that within the next 20 or so years at the present funding
level that the contribution level would zero out. Mr. Carter stated there
was an asset liability study performed in 1989 and that study did in fact
show there was a probability that continued investment gains could be
generated to such an extent that contributions to the system could be
eliminated. There was also a probability this would not happen. Mr.
Adler then said the 105% would virtually eliminate any probability or
possibility that could ever happen. Mr. Carter said it is a fact that if the
7
105% transfer mechanism is implemented there would always be a
contribution rate applicable for the ASRS.
Mr. Carter continued by referring to Recommendation #4, Section 1,
Page 1, and concurring with this recommendation. Other
recomme-ndations may be found in the report handed out prior to the
meeting by the Wyatt Company dated November 29,1990. There needs
to be a greater awareness of the ASRS.
Mr. Carter further stated that the Wyatt Company would concur on
Section 2 of the report, Recommendation #6, that the ASRS should have
greater flexibility over its annual budget determination and expenditures.
Representative Evans was recognized. He stated that in Appendix 6-4 it
shows that Arizona is running 5th in the percentage of assets and 1st in
benefits and he felt that this reflects that Arizona's programs are
working well. Mr. Carter stated that the Director of the ASRS currently
sits on the Executive Committee of one of the national organizations, so
the ASRS does participate in ongoing programs. If the intent of the
recommendation is to encourage continued participation, that would
certainly be appropriate.
Mr. Carter then referred to early retirement incentives being eliminated,
section 4 of the report. The authors have taken the position that they
should be eliminated. Our comment would be, fully understanding the
significance of what that would involve, that it is contrary to the general
trends within the benefit industry. Oftentimes it is in the best interests
of the public employer to encourage some early retirement and that is
the purpose of the early retirement subsidies and windows. True, early
retirement adds something to the cost. A portion of the 3.82% of pay
that is being contributed into this system is to pay for the subsidized
early retirement. Using the 105% criteria for the actual value funding
ratio again we would hope that that term be clearly dermed in statute
so that whatever triggering mechaniSm is developed, there can be no
misconception as to when it is to be applied and not applied. In
connection with the PRBE concept we would suggest that the 105% level
become a maximum level rather than a minimum. Section 5 statutorily
requires an experience study every 4 years. We would concur with the
suggestion that actuarial assumptions should be based on an experience
study. If you have a statute provision we might suggest a 5 year period
rather than 4 year period.
Mr. Carter referred to Recommendation #6 which requires an
independent actuarial review any time a change in assumptions results
in an increase in the contribution rate of more than plus or minus 30%
or a change in the actuarial accrued liability more than plus or minus
20%. He felt it would be a conflict of interest for him to comment on
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whether or not there should be an independent actuarial review. He
did say, however, if such a provision is implemented I think there should
be exceptions to the plus or minus 30% rule.
Mr. Evans inquired of Mr. Carter if lowering the contribution rate would
serve as a statement of intent. Mr. Carter stated he would leave that to
the determination of attorneys.
Mr. Adler inquired of Mr. Carter whether his concern here in having it
defined as a trust fund has anything to do with a potential conflict with
the IRS. Mr. Carter replied in the affirmative and again stated nowhere
in the statutes is the trust fund defined. This plan is qualified under
Section 401.A of the Internal Revenue Code and this qualifies a plan
assuming that there is a trust and that it is qualified under Section 501
of the Internal Revenue Code.
Mr. Guy inquired of Mr. Carter if he would address the Investment
Advisory Council, about lengthening of the terms, increasing experience,
knowledge of incumbency, etc. Mr. Carter responded by saying I am an
actuary and employee benefit consultant. I am not an asset services
consultant and therefore this is not in my area to comment on
investment related items. Mr. Guy further inquired of Mr. Carter
whether there is any reason why a retirement system would not want to
be funded 100%. Mr. Carter said most retirement plans have that as a
goal - to be fully funded.
In the private sector, the IRS and Congress regulate the contribution
patterns in private sector plans and the concept of that regulation
defining minimum contributions requirements for private sector
retirement plans to remain qualified is to reach a fully funded status.
Mr. Guy further inquired if there are any estimates of what the cost
would be if we do take all of the retirees and increase them to 2% per
year service. Mr. Carter stated they had not done those calculations.
The Speaker stated she believed that Mr. Kaufmann has done that and
will give them to Mr. Guy.
This concluded Mr. Carter's presentation
The Speaker recognized Richard Zoller who stated he was appearing only
as a taxpayer. He stated he was an executive in investments for a flrDl
for over 20 years and is now a member of the Investment Advisory
Council of the ASRS. He felt that one of the most important things the
study pointed out from his perspective, and from the committee's
perspective, in its recommendations for legislation is Figure 1,
particularly Item B. The primary purpose of the compensation plan is
to provide a total package. Ifyou wish to provide on a competitive basis
then the consultants pointed out that this system does provide a very
9
favorable retirement package already. If you start with the assumption
that the retirement system is part of the compensation package, then
that casts a question as to whether or not there should be any cost of
living increases. If the study could be faulted study in any place, it
would be where they pointed out the total retirement income but they
failed to actually include in the calculations social security, and we know
that social security has COLA.
The Chair then recognized Mr. Raymond Klein from Tucson. He stated
he was representing himself and is a member of the University of
Arizona Retirees' Association. We believe that it is essential that the
trust fund nature of the ASRS funds be put into statute. We recommend
a one time adjustment for retirees who retired with a benefit calculation
factor below 2% which is in the report. We strongly support eliminating
early retirement windows, therefore we disagree with the Wyatt
Company. We agree fully that they create all kinds of inequities. The
proposal in this report does not guarantee any PRBE's and we would
like a guarantee. The funding mechanism for the PRBE is inadequate
as shown by projections in Appendix 10.
Senator Todd recognized Mr. Ed Louttit, representing the University of
Arizona Retirees' Association as Chairman of their Legislative Action
Committee. He stated that a letter had been written to legislators on
this committee which should be received in approximately one week,
which will outline the association's goals (legislative) for 1991. We
would like to provide for a one time adjustment plan for retirees who
retire prior to the 1983 window or in 1984 to bring their pensions up to
that which they would receive had their benefits been calculated at 2%
per year of service. Cost of this should be borne by the ASRS assets.
The association would like to see an extension (not addressed in the
study) to future retirees a 3% tax equity provision to cover all service
credits earned prior to either January 1, 1989 or September 15, 1990 and
index the $2500 exclusion deduction from income to the COLA index.
We need an indexing of the exclusion deduction in an effort to offset the
effects of inflation.
Senator Todd recognized Mr. Robert Letson, a member of the University
of Arizona Retirees' Association who commended the legislature on
setting up the study and appreciated having an opportunity to meet with
Dr. Hurtado to express our concerns. He said he used to teach statistics
for undergraduate students going into education and ranking is one of
the very basic statistics often used. There are two ways of ranking and
one incorrect way of ranking. This study uses the correct way..He then
continued explaining at length the "ranking" system and the advantages
and/or disadvantages thereto by quoting several examples and many
statistics.
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The Chair recognized Mayne Jamison, representing the Research Study
Committee of the Phoenix Retired Teachers' Association. The
association has recently written a letter to each of you stating its
position. If there is an overfunded amount it's because our older retirees
have been denied ability of their purchasing power. Over time we have
never received a COLA. The association opposes retirement incentives
because they create unfair retirement benefits and dilute the system's
funding. The inevitable result of not having a COLA translates into
what would be a salary cut and incomes have constantly eroded and
should be corrected.
Senator Todd recognized Donald J. Shea, Chairman of the Coalition of
Active and Retired Employees of the ASRS, CARE. CARE has always
regarded the fund as a trust fund and thinks the report supports our
position on this. We feel that a COLA that is not based on a.d hoc
increases by the legislature is a necessity. The report also mentions the
issue of equity for those people who retired years ago under formulas
much less favorable than exist at present. We believe this should be
addressed as well.
Senator Todd recognized Patricia Healy, state legislative chairman for
the Catholic Daughters of the Americas. About 15 years ago she
happened to be here as a legislative observer for the League of Women
Voters and remembers discussions about the retirees, and at that point
in time some of them were getting 50% per month. Her understanding
is that such an aberration has been corrected. At that time many years
ago people were contributing 7%, the employee contributed 7% (before
social security was that high) and the employer contributed 7%. That is
possibly how this great overfunded condition came about. Employers
still contribute 7% of taxpayers'money. She objected: When you pay
compensation and you have expensed it out in your budget it's not your
property anymore. It's not the legislature's property and it truly belongs
in this trust fund. You don't count the social security and the
contribution rate is not 7% any more.· Retirees now put in their money
at 7% and she feels the committee needs to be aware of that. She
thanked the committee and said the Catholic Daughters have a lot of
retired teachers and a lot of retired civil servants. The ASRS fund
certainly is not overfunded.
The Speaker expressed her appreciation to the speakers for their input.
She stated what we have is a list of recommendations and they have
been distributed to members of the committee. She expressed
appreciation to Mr. Kaufmann, Dr. Hurtado and Mr. Carter for the work
they have done and the information they have brought to us.
The Speaker then explained the procedure to be followed. Each
recommendation will be handled separately as many are very complex
11
and complicated. If there is not an agreement, I believe we should move
to have that particular recommendation referred for further study, as the
legislature will continue their deliberations on the many aspects of the
report.
RECOMMENDATIONS:
ITEM 1:
Recommendation #1. Senator Todd moved that we accept
recommendation #1 with some amendments to include recommendations
suggested on Page 8 of Michael Carter's comments: Mr. Evans seconded
the motion, and expressed a desire to incorporate some of Mr. Carter's
comments in the recommendation. Mr. Maguire stated he had some
problems with this partIcular recommendation. The Speaker suggested
he present a written minority report to the committee. On voice vote
the motion to adopt recommendation #1 as amended by the inclusion of
Mr. Carter's comments carried.
Recommendation #2. Mr. Evans moved that recommendation #2 be
adopted as written. Senator Todd seconded the motion. After some
discussion, Mr. Evans amended his original motion by including Figure
3 of the final report. Motion carried. It was also suggested that staff
consult with legal counsel with reference to this particular
recommendation.
Recommendation #3. Mr. Evans moved that recommendation #3 be
adopted. Senator Todd seconded the motion. It should be noted that
the reference to Figure 1 is as amended pursuant to Mr. Carter's
comments. After further discussion, the motion carried.
Recommendation #4. Senator Todd moved that recommendation #4 be
adopted as is. Mr. Sutton seconded the motion. Motion carried.
Recommendation #5. Senator Todd moved that recommendation #5 not
be adopted. Mr. Sutton seconded the motion. After considerable
discussion, the motion that recommendation #5 not be adopted carried.
Recommendation #6. Senator Todd moved that recommendation #6 be
adopted. Discussion followed with reference that this recommendation
should be related to "retirement" only and exclude any other annuities,
i.e., social security, tax shelter annuities, etc. The committee therefore
agreed to insert the word "retirement" before benefits. Mr. Adler then
seconded the motion. The motion to adopt #6 carried. The consultants
noted that their fmal report would include the word "retirement" under
this recommendation so the study committee could adopt the
recommendation without amendment.
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Recommendation #7. Senator Todd moved that recommendation #7 be
adopted. The motion was seconded by Mr. Evans. Motion carried.
ITEM 4:
Recommendation #1. Senator Todd moved that recommendation #1 be
adopted. Mr. Evans seconded the motion. Motion carried.
Recommendation #2. Senator Todd moved that recommendation #2 be
adopted. Mrs. Gerard seconded the motion. Motion carried.
Recommendation #3. Senator Todd moved that recommendation #3 be
adopted as is. Mr. Evans seconded the motion. Motion carried.
Recommendation #4. Senator Todd moved that recommendation #4 be
adopted. Mrs. Gerard seconded the motion. Mr. Adler inquired if this
item relates to the manner in which the board is established or is this
merely for the purpose of adding representation from the legislature,
without any voting privileges. The Speaker stated that according to an
Attorney General's opinion legislators cannot vote as members of the
Retirement Board. They serve as ex-officio members only. Mrs. Gerard
stated that retirement issues will be assigned to the Government
Operations Committee, which she will chair, and she felt that it is
important to have a legislative person serve on the Board who is
knowledgeable on retirement issues. Motion carried.
Recommendation #5. Mr. Evans moved that we adopt recommendation
#5 as is. Mrs. Gerard seconded the motion. Motion carried.
Recommendation #6. Senator Todd expressed some concern with
reference to this recommendation. Mr. Adler suggested that this
recommendation be assigned to a study committee for further study. Mr.
Adler then moved that recommendation #6 be accepted for further study.
Mr. Evans seconded the motion. The Speaker stated she felt the
subcommittee to be assigned should come from the Government
Operations Committee. On voice vote, the motion carried.
ReCOmmendation #7. Mr. Evans moved that we adopt recommendation
#7 as is. Senator Todd seconded the motion. Mr. Adler felt that the
motion should be amended to include "advisory board members of the
board." Mr. Evans amended his motion and the motion carried.
Recommendation #8. Mr. Adler moved that recommendation #8 be
adopted as is. Mr. Evans seconded the motion. Mr. Maguire expressed
opposition to the fact that the subject here is the composition and
effectiveness of the ASRS Board. A lengthy discussion ensued. Dr.
Hurtado stated that their study did included an exhibit which describes
13
the make-up of other retirement systems which they had surveyed. He
further stated that in speaking with member groups they did not indicate
that they were not fairly represented. After considerable discussion
relating to many items, the motion to adopt recommendation #8 as is
passed.
Additional recommendations pertaining to Item #4:
1. Several of the study committee members noted they had received
letters and calls from persons dissatisfied with recent activities of the
ASRS Board. The committe directed staff to look further at how various
states' retirement systems are administered.
2. The study committee also agreed that qualifications for the ASRS's
director need to be prescribed in statute.
ITEM 5:
Recommendation #1. Senator Todd moved that we adopt this
recommendation as amended because of the fact Figure 1 had been
amended and changed. Mr. Evans seconded the motion. Mr. Guy stated
that perhaps he had misunderstood, as he was of the impression that all
of the recommendations under Item 5 would be referred for further
study. Some discussion ensued and after further consideration Senator
Todd withdrew the original motion and moved that recommendation #1
be accepted for further study.
Recommendation #2. Senator Todd moved that recommendation #2 be
accepted contingent on further study. Mr. Evans seconded the motion.
Some discussion was held with reference to increasing the 1.2 and 1.5
rates to bring current retirees up. A paper on the monthly cost of this
will be presented. Senator Todd's motion to accept for further study
carried on recommendations 2, 3, 5, 6 and 7.
Recommendation #4 was accepted for further study as to cost
implications only and was adopted but amended to delete the words "to
using part of the initial funding capacity of the Postretirement Benefit
Enhancement Dedicated Trust Fund."
ITEM 6:
Mr. Evans moved that recommendations #1 and #2 be adopted as is for
further study. Mrs. Gerard seconded the motion and stated she would
not ever vote again for another window. Mrs. Hull suggested that the
words "statutorily prohibited" be deleted and insert the word
"discouraged". In discussion, Mr. Adler suggested that possibly the
committee should discuss removing the education sector out of the
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retirement system. The motion to adopt recommendation # 1 as
amended and recommendation #2 as is carried.
ITEM 7:
Recommendation #1: Senator Todd moved to accept recommendation #1
and that it be amended to incorporate Mr. Carter's comments on Page
8, Figure 2. Mrs. Gerard seconded the motion. After some discussion
the committee adopted recommendation #1 as amended to incorporate
Mr. Carter's comments concerning this recommendation. Motion carried.
(Note: The committee adopted the minimum/maximum funding level
concept in general, but felt that further study was needed to determine
what that funding level should be.)
The Speaker by-passed recommendation #2 and discussed
recommendation #3. Senator Todd moved that the committee do not
accept recommendation #3. Mr. Evans seconded the motion. Mrs.
Gerard inquired as to the background of this recommendation. Mr.
Kaufmann stated this was suggested so as to protect the integrity of the
retirement fund. He further stated that the constitution provides that
the contribution rate will be determined by the actuary on an annual
basis, and they are recommending this mechanism whereby this portion
of law can not be overridden. Mr. Maguire stated he would support the
motion. The motion to not adopt recommendation #3 carried.
The Speaker then addressed recommendation #2. Senator Todd moved
that recommendation #2 be accepted with certain amendments. Mrs.
Gerard seconded the motion. In discussion, Mr. Guy referred back to the
report where this had been discussed and stated he must oppose the
motion unless there is something in there that allows for increased
benefits. Senator Todd suggested the word "minimum" be deleted and
the word "target" be inserted. The motion to adopt recommendation #2
as amended by inserting the word "target", striking the words "of 1.05"
and target funding level to be determined after further study, carried.
Recommendation #4. The Speaker stated she felt this recommendation
addressed Mr. Guy's suggestion. Mr. Guy then moved that
recommendation #4 be accepted for further study. Mr. Evans seconded
the motion. Motion carried.
Recommendation #5. Mr. Sutton moved that recommendation #5 be
amended to require that a study be done every 5 years instead of every
4 years. Senator Todd seconded the motion. Motion carried.
Recommendation #6. Mr. Adler moved that recommendation #6 be
accepted for further study. Mr. Evans seconded the motion. Motion
carried.
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Recommendation #7. The Speaker stated that she felt this
recommendation likewise would require more study by the Government
Operations Committee. Mr. Adler moved that recommendation #7 be
accepted for further study. Mr. Evans seconded the motion. Motion
carried. _
Recommendation #8. Senator Todd moved that recommendation #8 be
adopted. Mr. Evans seconded the motion. Motion carried.
Recommendation #9. Senator Todd moved that recommendation #9 be
adopted. Mr. Evans seconded the motion. Motion carried.
ITEM 9:
Recommendation #1. This recommendation relates to increasing the
limit on foreign investments to 25%. The Speaker stated she felt that
this had been discussed by either this committee or another committee,
who suggested the 25% needs to be increased. Dr. Hurtado stated they
did not feel that the 25% should be exceeded. Mr. Guy moved to accept
recommendation #1 and insert the words "up to" before the figure 25%.
Mr. Evans seconded the motion. Motion carried.
Recommendation #2. Senator Todd moved that recommmendation #2
be adopted as is. Mr. Evans seconded the motion. Motion carried.
Mr. Adler asked whether or not the legislature should have an actuary
to back up the ASRS actuary. Mr. Kaufmann responded by saying it
never hurts to have two opinions. Several closing remarks were made
by the committee members.
Senator Todd then moved to accept the final report to evaluate the ASRS
as it was distributed, along with the amendments and minority reports
thereto. Mr. Evans seconded the motion. Motion carried.
At 6:30 p.m. Mr. Evans moved that the meeting be adjourned. Senator
Todd seconded the motion. Motion carried.
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Attachment E
Final Report
on the
Study of the Arizona State Retirement System
prepared by
Kaufmann and Goble Associates
in association with
Cyberserv International
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KAUFMANN AND GOBLE ASSOCIATES
in association with
CYBERSERV INTERNATIONAL CO.
April 1990
10 ALMADEN BOULEVARD. SAN JOSE, CALIFORNIA 95113-2226 • TELEPHONE (408) 298-1170
Management Summary
• To incorporate into State Statutes, a definition of the Primary Intent of the Arizona
State Retirement System.
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ACTUARIES AND CONSULTANTS
Assoc;a~es
Kaufmann and Gabie
Dear Representative Hull and Senator Todd:
ROridid ,4" GO[)(E'
Sidne:,,' T. KdL:rmdl1n
Paul J. PUtlCO
• Describes our Data Collection, Interviewing, and Data Analysis Processes.
•. Presents comprehensive Displays, Exhibits and Summaries of the data we collected.
• Presents a review and discussion of the Findings associated with each
Recommendation.
Shnply stated, we have made a number of important recommendations. These
recommendatlons are Intended to achieve the followmg strategic objec11ves:
Kaufmann and Goble Associates, in association with Cyberserv International Co., is
pleased to present this FJnal Report an the Study oftheAdrona State RetIrement System.
Our work was conducted in conjunction with the work of the Legislative Council Study
Committee as set forth in Items I, 4, 5, 6, 7 and 9 of Senate Bill 1129. Our FJnal Report:
Legislative Council Study Committee
on the Arizona State Retirement System
Capitol Building, House Wmg
Phoenix, AZ 85007
Representative Jane Dee Hull
Co-chainnan
and
Senator Doug Todd
Co-chainnan
April 30, 1990
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• To incorporate into State Statutes, a definition of the Trost Fund Nature of the Arizona
State Retirement System.
• To incorporate into State Statutes, a definition of the Primary Funding Objectives of
the Arizona State Retirement System.
• To incorporate into State Statutes, a Protective Mechanism that will provide for the
maximum feasible security for the Arizo