ARIZONA STATE SENATE
Phoenix, Arizona
ASRS actuarial
computation method
Purpose
Changes the methodology for determining Arizona State Retirement System (ASRS) contribution rates from the projected unit credit (PUC) method to the entry age normal (EAN) method beginning in the FY 2004 - 2005 biennium. In addition, the legislation changes the funding period to a rolling 20-year period.
Background
During the 2000 legislative session the ASRS Actuarial Computation Method Study Committee was established (Laws 2000, Chapter 341). This committee was charged with examining and comparing actuarial computation methods that may be appropriate for ASRS, including the EAN cost method and the PUC method. This legislation is a result of the discussions and study of the ASRS Actuarial Computation Method Study Committee.
Different assumptions
regarding employee tenure result in different contribution rates being
calculated under the PUC versus the EAN method. In theory, contribution rates are low at the beginning of a
person’s career and then increase over time with the PUC method. In contrast,
contribution rates under the EAN method are level over a person’s career. However, even though ASRS uses the PUC method,
contribution rates have been decreasing, rather than increasing. This is the result of better than expected
investment performance, which has created a surplus that is then used to reduce
the contribution rate paid by employers and employees. In addition, the continued entrance of
younger people into the workforce participating in ASRS also has a downward
effect on the contribution rate.
According to the Joint
Legislative Budget Committee (JLBC), when the PUC method is used, the
contribution rate calculation does not include an assumption regarding employee
tenure or length of service. Instead,
the PUC method calculates the required contribution based only on actual length
of service. The result is a
contribution rate that will increase over time as length of service
increases. In contrast, the EAN cost
method assumes that the employee will be with the employer for a length of
time. Thus, the EAN method includes anticipated
future service in the calculation of the required contribution. The result is a contribution rate that is
stable over the employee’s career, rather than one that increases with years of
service.
The ASRS contribution rate
increases when anticipated future service is included in the calculation of the
contribution rate, because the ASRS average age/service mix is relatively
low. For example, in order for the
contribution rate to decrease when changing from PUC to EAN the average would
need to be age 55 with 20 years of service.
However, the current ASRS average is age 43 with 8 years of
service.
The FY 2002-2003 funding period is 15 years, however, the system is currently transitioning to a rolling 30-year period by annually adding an additional year. H.B. 2004 changes the funding period to a rolling 20-year period
Provisions
1. Changes the ASRS computation funding method from the PUC to the EAN cost method.
2. Requires the Board to begin phasing in the use of the EAN cost method over a ten-year period of time beginning with the June 30, 2002 valuation of ASRS and for the employer contributions payable beginning on July 1, 2003.
3. Changes the amortization-funding period from a rolling thirty-year period to a rolling twenty-year period.
4. Makes technical and conforming changes.