ARIZONA STATE SENATE
Phoenix, Arizona
retirement benefits; defined
contribution supplement
Background
In 1999, the Legislature
established the optional defined contribution (DC) retirement plan for state
term limited elected officials and exempt state officers and employees, except
state university officers and employees of the Department of Public Safety
(DPS) (Laws 1999, Chapter 329, section 6).
The optional DC retirement plan is offered as an alternative to the
benefits of the defined benefit (DB) plan.
The fund manager of PSPRS is
required to administer and offer the optional DC retirement plan. The plan became effective December 1, 2000
and is funded by employee and employer matching (2.66 percent)
contributions. A one-time election
period that began December 1, 2000 and ended December 30, 2000 was initiated
that required all eligible members to make an irrevocable election to transfer
the actuarial accrued liability of the employee’s DB plan to the optional DC
retirement plan. Anyone (qualified
positions) hired after the effective date of the optional DC retirement plan
has to elect, at the time of employment, to belong to the optional DC
retirement plan, otherwise, they automatically become a member of their
respective DB plan.
Also in 1999, the Legislature established for state term-limited elected officials and employees of the Legislature an optional tax deferred annuity and deferred compensation plan (five percent matching contribution plan) in lieu of participation in either the EORP or ASRS DB plan (Laws 1999, Chapter 329, sections 1 and 2). Under this optional plan, only a state elected official subject to term limits or employee of the Legislature may elect this optional five percent plan at the time of employment. SB 1295 extends the DC plans to all members of Arizona’s four retirement systems.
ASRS actuary estimates there will be no immediate fiscal impact to the retirement funds associated with this portion of the measure.
Currently, an ASRS member
who meets the requirements for retirement benefits at normal retirement (any
combination of age and service totaling 80 points) receives a monthly life
annuity that equals the number of whole and fractional years of credited
service multiplied by 2.1 percent, multiplied by the member’s average monthly
compensation. This remains the same
even if the member continues to work past normal retirement. In order to encourage members to continue to
work past normal retirement, S.B. 1295 gives active members who have attained
at least a normal retirement age, an opportunity to receive and to purchase
additional credited service.
ASRS estimates that this
portion of the bill will increase the contribution amount by three basis
points.
Permanent Benefit Increase Enhancement
Permanent benefit increases
(PBIs) are also known as cost of living adjustments (COLAs) and refer to money
available to fund retirement benefit increases based on the amount of earnings
the various retirement systems earn over a set percentage. Members who have retired ten or more years
ago receive the same COLA amount as recent retirees, and benefits based on
one's rate of compensation at the time or retirement often do not keep pace
with inflation. S.B. 1295 would give
members who have been retired five or more years an additional PBI based on
years of retirement.
ASRS estimates the cost to
the ASRS fund for this part of the bill to be an increase in the contribution
rate of ten basis points.
Currently, a retired member’s monthly compensation is calculated by the member’s years of service multiplied by 2.1 percent. This was last changed in 1998 (Laws 1998, Chapter 327) when the retirement formula multiplier was increased from 2.0 percent to the present 2.1 percent, giving all defined benefit ASRS members and retirees a five percent monthly compensation increase. According to ASRS administrators, a graded multiplier would reward longer service and may aid in retaining employees.
ASRS estimates the increase in the contribution rate to be 92 basis points for this part of the measure.
Health
Insurance Premium Benefit Increase
The Legislature requires ASRS to pay a portion of a retired member’s health care premium. The subsidy amount differs for members, survivors or dependents who are eligible for Medicare and those who are not. The portion of the member’s health care premium that is not covered by the various plans is paid from the member’s retirement benefit or out of the member’s pocket. This amount has not been increased since its inception in 1988. This bill would increase the amount that ASRS administrators pay for the heath insurance subsidy for all members of ASRS.
ASRS estimates the cost for this portion of the bill at 60 basis points.
Partial
Lump Sum Option
Currently, retirees of ASRS
have seven different forms of retirement payment available to them, including a
life annuity and a joint and survivor option.
Members of the three smaller retirement systems do not elect a payment
option -- they are paid a monthly pension and their spouses are automatically
provided with a pension if the member dies before them. None of the retirement systems offer a lump
sum payment.
This bill is allows a member
to receive a sum of money for a purchase or investment. Under this bill, if a member should elect to
receive, for example, two years' worth of his pension at once, the member would
continue to receive a monthly pension, but it would be actuarially reduced by
the amount of the lump sum payment.
ASRS states that there will
be no fiscal impact to the retirement funds associated with this portion of the
bill.
A Joint Legislative Budget
Committee fiscal note has been ordered for this measure.
1. Allows the Board or the Fund Manager to establish, administer, manage and operate a supplemental DC plan for all contributing members of ASRS, PSPRS, CORP and EORP.
2. Authorizes the Board or the Fund Manager the authority to implement the supplemental DC plan that is in addition to the employees existing DB retirement plan and requires the employer to initiate salary deductions for the supplemental DC plan as directed by each employee.
3. Allows the Board or the Fund Manager to employ services necessary for the operation and administration of the supplement DC plan, contract with multiple vendors, perform all acts necessary and proper for the protection of the plan and enter into intergovernmental agreements.
4. Requires the supplemental DC plan to be a qualified governmental plan under section 401(a) of the Internal Revenue Code and requires the plan to be tax-exempt under section 501 of the Internal Revenue Code.
5. Requires employee contributions to be considered picked-up by the employer, for tax purposes only, prior to being taxed and treated as employer contributions under section 414(h) of the Internal Revenue Code. The contributions picked-up may be made through a reduction in the employee’s salary or an offset against future salary increases or both.
6. Specifies that an employee participating in the supplemental DC plan does not have the option of choosing to receive the contributions directly instead of the employer paying the amounts to the plan.
7. Requires an employee, if electing to participate in the supplemental plan, to contribute at least one percent of the employee’s gross salary and irrevocably contribute for at least one year. Allows the employee to annually increase or decrease the contributions in increments of one percent up to the maximum allowed by law (25 percent of total contributions).
8. Allows the employer to elect to match the pre-tax contributions made by the employee at a rate determined by the employer. The employer rate will be determined at the beginning of the employer’s budget cycle and will terminate at the end of the budget cycle. The match must be uniform for all local government employees.
9. Specifies that all contributions are immediately vested.
10. Repeals Title 38, chapter 5, article 8, the optional DC retirement plan.
11. Terminates the tax-deferred annuity and deferred compensation pilot program and the optional DC retirement plan. However, those who have already elected to participate in these plans will continue to do so.
12. Allows employers to offer active members of ASRS who have reached the normal retirement age, an agreement that would include the following:
13. Requires the member and employer to make contributions according to the agreement between them to the supplemental defined contribution plan for the purpose of purchasing additional credited service.
14. Stipulates that if a member does not complete the terms of the agreement, the member forfeits any credited service provided under the agreement. However, any member contributions made in accordance with the agreement are the property of the member or the member’s estate.
15. Stipulates that if an employer fails to complete the terms of the agreement, the employer must make all contributions required by the agreement to the supplemental defined contribution plan.
16. Prohibits a member who enters into an agreement of this sort from purchasing other credited service for other public service due to reinstatement, federal government employment, leave of absence or military service.
17. Specifies that monies available for future benefit increases must earn interest at a rate of eight percent per year, and that this interest must be used to pay additional benefit increases for members who have at least ten years of credited service.
18. Enhances at an unspecified amount, the permanent cost of living benefit increase graduated by the number of years since retirement for members who have been retired for at least five years.
19. Establishes a graduated retirement multiplier that begins at 2.1 percent for members with less than 15 years of service, and increases as follows:
20. Creates a cap for a member’s monthly life annuity of not more than 80 percent of the member’s average monthly compensation for those who become members on or after December 31, 2001.
21. Provides for an increase in the retired members’ health care insurance premium subsidy for members who have ten or more years of credited service as follows:
22. Allows a member, beginning July 1, 2002, to elect to receive a lump sum payment equal to up to three years of the member’s retirement benefits.
23. Requires that the member’s benefit must be actuarially reduced to provide for the lump sum payment.
24. Stipulates that an elected lump sum payment will be made at the time of retirement.
25. Requires that any benefit increases be based on an amount less the lump sum payment if increases are calculated as a percentage of the member’s benefit amount.
26. Requires that any benefit increase based on years of service be calculated without regard to the lump sum payment.
27. Provides necessary definitions.
28. Makes technical and conforming changes.
29. Provides for a delayed effective date of January 1, 2002.
Prepared by Senate Staff
February 22, 2001