FOR CAUCUS & FLOOR ACTION
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ARIZONA STATE SENATE
RESEARCH STAFF
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MARA KELLY LEGISLATIVE RESEARCH ANALYST FINANCIAL INSTITUTIONS & RETIREMENT COMMITTEE Telephone: (602) 542-3171 Facsimile: (602) 542-7833 |
DATE: March 7, 2000
SUBJECT: Strike Everything
Amendment to H.B. 2007
Purpose
Optionalizes but also expands the number of possible participants in the defined contributions (DC) retirement plan created last session. Terminates the “enhanced deferred compensation” retirement program created last session.
Background
Last session, the Legislature established a defined contributions (DC) retirement option for term-limited, state-elected officials and certain exempt state officers and employees beginning December 1, 2000 (Laws 1999, Chapter 329). The law requires both the employer and employee to contribute 2.66 percent of the employee’s salary to the plan and requires the actuarial value of the employee’s current pension be transferred over to the DC plan. Importantly, the law also requires individuals who choose this plan to leave their former defined benefit (DB) retirement plan with no option of returning to it. The strike everything amendment fundamentally changes last year’s law by eliminating the need to choose either the new DC plan or an existing DB plan. Instead, with this amendment, individuals remain with their existing DB plan and may additionally choose to participate in the DC plan. Unlike last year’s law, the individual pays at least three percent of the individual’s salary while the employer pays nothing. This “optionalized” DC plan is available to far more people than the current DC plan since it applies to all state officers and employees, numbering in the tens of thousands, instead of certain exempt officers and employees, estimated to be approximately 7,000 people.
As originally envisioned, the Fund Manager for the Public Safety Personnel Retirement System (PSPRS), was to administer the DC plan by, among other things, entering into contract(s) with financial vendor(s). However, administrators with PSPRS raised concern that the relatively small number of expected participants in the plan might lead to high administrative and management fees for the participants. Because the governing committee for tax deferred annuity and deferred compensation program already oversees a multimillion dollar deferred compensation contract for state employees and therefore has better purchasing power, its administration of this plan will likely result in far lower fees for participants.
Last session, the Legislature also established what was then known as the “enhanced deferred compensation” program for term-limited, state-elected officials and legislative employees, a much smaller group than the DC plan (Laws 1999, Chapter 329). This program was modeled on an existing program known as deferred compensation, or a 457 account, which allows individuals in DB plans to set aside additional monies on a pre-tax basis. The enhanced deferred compensation program allows participants to opt out of either the Arizona State Retirement System (ASRS) or Elected Officials’ Retirement Plan (EORP) and have their employers contribute five percent (versus 2.66 percent for DC plan participants) of their salary to this program. Members of this program, unlike the DC plan, could not transfer the actuarial value of their DB pension and would retain whatever benefits accrued to their DB plan before their election to the program. At the time this program was created, it was assumed that the governing committee overseeing 457 accounts could only administer 457 accounts. During the interim, however, it was discovered that the governing committee has authority to set up 401 and 403(b) plans in addition to 457 plans and that it had in fact created a 401/457 hybrid for participants in the enhanced deferred compensation program (now referred to by ASRS administrators as the Defined Contribution Money Purchase Plan). This action defeated the purpose of establishing a separate, more highly funded program than the DC plan as 401 plans are portable and allow a greater level of contributions than 457 accounts. As a result, the strike everything amendment terminates this program and leaves only an optionalized DC plan.
Provisions
Defined Contributions Retirement Plan
1. Optionalizes the DC retirement program created last year by eliminating the need to choose either the DC plan or an existing DB plan. Instead, individuals continue to participate in their existing DB plan and may choose the DC plan as an additional retirement savings device.
2. Expands the number of individuals who may participate in the optionalized DC plan to include all state officers and employees.
3. Requires officers or employees who participates in the optionalized DC plan to contribute at least three percent of their gross salary to it.
4. Permits an officer or employee who participates in the optionalized DC plan to make additional, after-tax contributions to the plan subject to IRS limitations. Such contributions shall be elected in writing and in multiples of one percent.
5. Requires the Department of Administration to initiate salary reductions or deductions for the optionalized DC plan and allows a participant’s employer to do so.
6. Specifies any salary deferred under the optionalized DC plan shall be included as regular compensation or salary for the purpose of computing retirement and pension benefits.
7. Transfers administration of the optionalized DC plan from the Fund Manager of PSPRS to the governing committee for tax deferred annuity and deferred compensation plans.
8. Eliminates requirement that the DC plan administrator maintain records for the operation and administration of the plan.
Enhanced Deferred Compensation Retirement Program
9. Terminates the enhanced deferred compensation retirement plan option as of July 31, 2000.
10. Specifies those employees and state elected officials who elect to participate in the program before July 31, 2000 may continue to do so.
Miscellaneous
11. Allows term-limited state elected officials participating in EORP to transfer the actuarial value of their pensions into the optionalized DC plan. Requires this request be made in writing to the Fund Manager during a 38-day period (December 1, 2000 through January 7, 2001).
12. Makes technical and conforming changes.
13. Provides for a general effective date.
Amendments Adopted by Committee
1. Adopted the strike everything amendment.
Senate Action
FIR 3/1/00 DPA/SE 5-1-1-0
MK/jas