ARIZONA STATE SENATE

Phoenix, Arizona

FINAL REVISED

FACT SHEET FOR S.B. 1328

~~school districts; annual financial reports~~

(NOW: retirement; deferred option)

Purpose

Creates, on a five-year pilot program basis beginning July 1, 2001, a Deferred Retirement Option Plan (DROP) for members of the Public Safety Personnel Retirement System (PSPRS) who are eligible for normal retirement and have earned at least 25 years of credited service.

Background

Deferred retirement programs enable participants to accumulate a substantial lump sum payment upon termination of employment. To receive this payment a participant, instead of taking retirement, places his or her monthly pension payment into a DROP account that also earns or is credited with a set interest rate (currently nine percent guaranteed) while the participant continues working. In exchange, the participant ceases to accrue credited years of service or benefit increases based on salary raises during this period of time. Upon termination of employment, the participant starts receiving monthly pension payments along with the lump sum payment. Numerous agencies throughout the country have enacted deferred retirement programs since the late 1980’s. These agencies are within the states of California, Texas, Florida, Louisiana and Oklahoma.

According to advocates of a DROP, it allows agencies to retain senior, experienced workers who would otherwise retire after achieving high retirement incomes and therefore lowers recruiting and training expenses. Advocates also assert it saves government agencies money since they no longer have to contribute a percentage of the employee’s pay to the retirement system. Opponents point out, however, that participants in this bill’s version of a DROP continue to earn a full salary while in such a program. Additionally, since participants’ salaries will increase as they no longer contribute to PSPRS, more eligible members may decide to participate in DROP, defer a true retirement and effect the actuarial assumptions critical to a defined benefit retirement system. As a result, employer contribution rates may increase and could neutralize any employer contribution savings.

Provisions

Basic Overview

1. Creates, on a five-year pilot program basis, a Deferred Retirement Option Plan (DROP) for members of the Public Safety Personnel Retirement System (PSPRS) who are eligible for normal retirement and have earned at least 25 years of credited service. DROP begins on July 1, 2001 and ends June 30, 2006.

2. Requires the PSPRS Fund Manager to administer and offer a DROP on a voluntary basis to its members.

3. Requires DROP participants to voluntarily and irrevocably:

· Designate a participation period that is not more than five years

· Cease to accrue retirement benefits (beginning on the first day of a member’s DROP participation)

· Have their retirement benefits (calculated in the same manner as normal retirement) and an amount that represents interest at a rate determined by the fund manager credited to a DROP account

· Receive retirement benefits on termination of employment at the same time and in same manner as otherwise prescribed by retirement laws

· Agree to terminate employment on completion of the DROP participation period designated by the member on an appropriate form (participants lose the interest accumulation on their DROP account if they do not terminate employment upon completion of the DROP participation period).

4. Stipulates that participation in the DROP terminates upon (1) completion of the DROP period, (2) termination of employment, (3) death of a member or (4) approval of disability retirement benefits (but only if the injury occurred during DROP participation period).

5. Gives DROP participants, upon termination of the DROP participation period and employment, a lump sum distribution of the monthly retirement allowance and interest that accrued to their DROP accounts. If permitted by the Internal Revenue Service, participants may transfer the lump sum to an eligible retirement plan or individual retirement account.

Detailed Provisions

6. Contains a purpose clause.

7. Prohibits DROP participants from receiving health insurance subsidies or cost of living adjustments during DROP.

8. Stipulates all amounts credited to a DROP account are fully vested.

9. Stipulates that if termination of employment for cause is reversed, a member’s participation in DROP (minus any benefits previously distributed) shall be reinstated for the duration of the original DROP participation period.

10. Permits DROP participants to early terminate participation in DROP by terminating employment.

11. Specifies a DROP participant does not have a claim on the assets of PSPRS with respect to the member’s DROP account and assets shall not be set aside for any DROP participant that are separate from all other system assets.

12. Permits DROP participants who become disabled during the DROP period to apply for disability retirement benefits as long as the injury occurred during the DROP period. Prescribes the disability benefit computation.

13. Requires DROP participants to designate a beneficiary who shall receive DROP monies in the event of a participant’s death and stipulates that if a participant dies without a beneficiary all DROP distributions shall be made to the estate of the DROP participant.

14. Prohibits DROP participants from designating a beneficiary that abrogates a participant’s community property obligations under Arizona law.

15. Specifies DROP does not jeopardize the tax qualified status of PSPRS and allows the Fund Manager to adopt any necessary provisions for DROP to comply with federal rules or laws.

16. Contains a repeal date of July 1, 2006.

17. Specifies that despite the July 1, 2006 repeal date, DROP participants who choose DROP before the repeal date may continue participation in it until completion under the prescribed DROP rules.

18. Provides for a general effective date.

Amendments Adopted by the House of Representatives

1. The House adopted a strike everything amendment regarding a (1) DROP for PSPRS and the Corrections Officer Retirement Plan (CORP) and (2) a 20-year retirement for CORP.

Amendments Adopted by Conference Committee

1. Restricts a DROP to PSPRS only.

2. Removes 20-year requirement for CORP.

Senate Action House Action

ED 2/10/00 DPA 8-0-1-0 ED 3/9/00 W/D

3^rd Read 2/24/00 30-0-0-0 GOV REF 3/10/00 4-0-0-2

Final Read 4/17/00 26-3-1-0 3^rd Read 3/24/00 53-3-4-0

Final Read 4/18/00 54-2-3-1

Signed by Governor 4/24/00

Chapter 340

Prepared by Senate Staff