Pension Update – SB 1609 04.04.2011

retirementThe bill got out, 4-2, with Rep. Jerry Weiers (R) and Rep. Chad Campbell (D) both voting against the bill.  The rules attorney, Don Jansen, all but assured the committee members that this bill will trigger a law suit.  Rep. Campbell hammered the point that adjustments to contribution limits violates the state constitution and federal contract law.  Jansen justified that the bill is proper and constitutional by stating that there is no precedent in AZ for classifying contribution rates as “benefits.”  Rep. Bob Robson (R) expressed his own concerns, but agreed to move it forward.  Rep. Weiers made it clear that he believes this bill is problematic and will violate the state constitution.

The bill now moves to Caucus.  We should expect the bill to move quickly to the floor maybe as earlier as later this week. 

Watch the Video Here

SB 1609 Overview- As of April 4, 2011

SB 1609 makes changes to the existing contribution and benefit structures for the Public Safety Personnel Retirement System (PSPRS), the Elected Officials Retirement Plan (EORP) and the Corrections Officers Retirement Plan (CORP).

Provisions

 Public Safety Personnel Retirement System (PSPRS)

          Redefines “normal retirement date” for an employee who becomes a member of the system on or after January 1, 2012, as the first day of the calendar month immediately following the employee’s completion of 25 years of service if the employee is at least 52.5 years old.

          Redefines “average monthly benefit compensation” for an employee who becomes a member of the system on or after January 1, 2012, as five consecutive years within the last 20 completed years of credited service that yield the highest average.

          Defines “excess investment earnings amount” as an amount that exists when the ratio of market value of assets to the actuarial accrued liability of the fund is:

        70% or less, zero;

        more than 70% but less than 80%, one-quarter of the positive difference, if any, between the total return of the plan and 9%;

        80% or more, one-half of the positive difference, if any, between the total return of the plan and 9%.

          Prohibits members, for purposes of computing retirement benefits, from using third party contracts between public agencies for law enforcement, fire or emergency medical activities or where the employer supervises the employee’s performance of those activities. 

          Removes the member’s flat contribution rate of 7.65% of the member’s compensation, retroactive to July 1, 2011

          Sets the contribution rate for an employee who becomes a member before January 1, 2012, retroactive to July 1, 201l:

        7.65% of member’s compensation through June 30, 2011;

        9.65% of member’s compensation through FY 2011-2012;

        10.65% of member’s compensation through FY 2012-2013 and;

        for FY 2013-2014 and thereafter, either 11.65% of member’s gross salary, or 33.3% of the sum of the contribution rate from the preceding fiscal year and the aggregate computed employer contribution rate that is calculated, whichever is lower. 

          Prohibits, retroactive to July 1, 2011, the member’s contribution rate from being less than 7.65% of the member’s compensation.  The employer contribution rate shall not be less than the amount needed to meet both the normal cost plus the actuarially determined amount required to amortize the unfunded accrued liability.

          Sets the contribution rate for an employee who becomes a member on or after January 1, 2012, retroactive to July 1, 201l:

        10.65% of member’s compensation through June 30, 2012;

        12.15% of member’s compensation through FY 2012-2013 and;

        for FY 2013-2014 and thereafter, either 13.65% of member’s gross salary, or 33.3% of the sum of contribution rate from the preceding fiscal year and the aggregate computed employer contribution rate that is calculated, whichever is lower. 

          Prohibits, retroactive to July 1, 2011, the member’s contribution that exceeds 7.65% of the member’s compensation from being used to reduce the unfunded accrued liability in FY 2011-2012 and thereafter. 

          Requires an employer to pay an alternative contribution rate (ACR) for a retired member who returns to work in any capacity in a position ordinarily filled by an employee in an eligible group.

          Stipulates that the return to work provisions apply to a retired member who returns to work with another participating employer, and a retired member who returns to work after 60 consecutive days with the same employer from which the employee retired.

          Sets the ACR at the portion of the total required contribution that is applied to the amortization of the unfunded actuarial accrued liability, based on actuarial calculations of the total required contribution for the preceding fiscal year. 

          Requires that the ACR be applied to the compensation, gross salary or contract fee of a retired member who returns to work.

          Sets a minimum of 8% for the ACR.

          Stipulates that all ACR contributions are irrevocable and shall be used as benefits or to pay expenses of the plan. 

          Penalizes an employer for delinquent ACR payments and adds interest until payment is received by the plan.

          Requires an employer or a retired member to submit any reports, data, paperwork or materials that are requested by the Board and that are necessary to determine the compensation of a retired member who returns to work or necessary to determine the function of the return to work program.

          Limits participation in the deferred retirement option plan to those employees who become members of the system before January 1, 2012. 

          Sets the retirement benefit, for a member who becomes a member on or after January 1, 2012 and who has 25 years of credited service, at 62.5% of the member’s average monthly benefit compensation. 

          Modifies the amount for other than 25 years of credited service:

        Reduces by 4% for each year of credited service fewer than 25 years;

        Increases by 2.5% of the member’s average monthly benefit compensation multiplied by the number of the member’s years of credited service in excess of 25 years and;

        Limits the maximum amount payable as a normal pension to 80% of the average monthly benefit compensation. 

          Prevents an individual who becomes a member of the system on or after January 1, 2012 from being eligible for a deferred annuity.  A deferred annuity is a lifetime monthly payment actuarially equivalent to the annuitant’s accumulated contributions plus an equal amount paid by the employer.  That member may be eligible for normal retirement if the member attains the service requirement for normal retirement. 

          Changes the benefit payment for a member who becomes a member of the system on or after January 1, 2012, and who terminates employment for any reason other than death or retirement, to allow the member to withdraw the member’s accumulated contributions plus interest at a rate determined by the Board.

          Replaces fund manager duties with duties of the PSPRS Board.

          Stipulates that the excess investment earnings are equal to the total assets of the fund less any amount allocated to the excess investment earnings account multiplied by the excess investment earnings amount, rather than one-half of the positive difference between the total return of the system and 9%.

          Stipulates that the excess investment earnings on pensions in payment status are zero if the average annual return of the plan over the period of years established by the Board for use in the calculation of the actuarial value of assets is less than or equal to 9%.

          Requires the administrator to determine the ratio of the market value of assets to the actuarial accrued liability of the fund for each fiscal year.

          Repeals a dual enactment.

 Corrections Officer Retirement Plan (CORP)

          Defines average monthly salary for an employee who becomes a member of the plan on or after January 1, 2012, as one sixtieth of the aggregate of salary paid during a period of 60 consecutive months of service in which the member received the highest salary within the last 120 months of service.

          Defines normal retirement date for an employee who becomes a member of the plan on or after January 1, 2012, as:

        the first day of the month immediately following completion of 25 years of service if the employee is at least 52.5 years old or;

        the employee’s 62nd birthday and completion of 10 years of service.

          Defines excess investment earnings amount as if the ratio of market value of assets to the actuarial accrued liability of the fund is:

        70% or less, zero;

        more than 70% but less than 80%, one-quarter of the positive difference, if any, between the total return of the plan and 9% and;

        80% or more, one-half of the positive difference, if any, between the total return of the plan and 9%.

          Removes a dual enactment.

          Changes the benefit payment for a member who becomes a member of the system on or after January 1, 2012, and who terminates employment for any reason other than death or retirement, to allow the member to withdraw the member’s accumulated contributions plus interest at a rate determined by the Board.

          Changes the minimum requirements, for a member who becomes a member on or after January 1, 2012, for a normal retirement pension to one of the following:

        at least 62 years of age and 10 or more years of service, or

        at least 52.5 years of age and 25 years or more of service. 

          Sets the amount of normal retirement benefit for a member who becomes a member on on after January 1, 2012 and has 25 years of credited service, to 62.5% of the member’s average monthly salary, except:

        if the person retires with more than 25 years of credited service, increases by 2.5% of the member’s average monthly benefit compensation multiplied by the number of the member’s years of credited service in excess of 25 years, or

        if the person retires with less than 25 years of credited service, reduces the pension to the product of 2.5% of the member’s average monthly salary and the member’s credited service. 

          Stipulates that for a person who becomes a member of the plan on or after January 1, 2012, the amount of an ordinary disability pension is equal to a fraction times the member’s normal retirement pension.  The fraction is obtained by dividing the member’s actual years of credited service, not to exceed 25, by 25.  

          Deletes members’ contribution rates previously established, retroactive to July 1, 2011, and establishes a new contribution rate:

        through June 30, 2011, 8.41% and 7.96% for a dispatcher;

        for FY 2011-2012, 8.91% and 8.46% for a dispatcher;

        for FY 2012-2013 and each fiscal year thereafter, 8.91% or 50% of the sum of the member’s contribution rate from the preceding fiscal year and the aggregate computed employer contribution rate, whichever is lower, except that the member contribution rate shall not be less than 7.65%.

          Specifies that the contribution rate for a full-time dispatcher is 45 basis points less than the member contribution rate, except that at the close of any fiscal year, if the plan’s actuary determines that the aggregate ratio of the funding value of the accrued assets to the accrued liabilities is at least 100%, a full-time dispatcher’s contribution rate is equal to the member contribution rate for the next fiscal year.

          Stipulates that for FY 2011-2012 and each year thereafter, the amount of the member’s contribution rate that exceeds 8.41%, or 7.96% for a full-time dispatcher, shall not be used to reduce the employer’s contributions. 

          Requires an employer to pay an ACR for a retired member who returns to work in any capacity in a position ordinarily filled by an employee in an eligible group.

          Stipulates that the return to work provisions apply to a retired member who has been retired for 12 consecutive months.

          Sets the ACR at the portion of the total required contribution that is applied to the amortization of the unfunded actuarial accrued liability, based on actuarial calculations of the total required contribution for the preceding fiscal year. 

          Requires that the ACR be applied to the compensation, gross salary or contract fee of a retired member who returns to work.

          Sets a minimum of 6% for the ACR.

          Stipulates that all ACR contributions are irrevocable and shall be used as benefits or to pay expenses of the plan. 

          Penalizes an employer for delinquent ACR payments and adds interest until payment is received by the plan.

          Requires an employer or a retired member to submit any reports, data, paperwork or materials that are requested by the Board and that are necessary to determine the compensation of a retired member who returns to work or necessary to determine the function of the return to work program.

          Stipulates that the excess investment earnings are equal to the total assets of the fund less any amount allocated to the excess investment earnings account multiplied by the excess investment earnings amount, rather than one-half of the positive difference between the total return of the system and 9%.

          Stipulates that the excess investment earnings on pensions in payment status are zero if the average annual return of the plan over the period of years established by the Board for use in the calculation of the actuarial value of assets is less than or equal to 9%.

          Requires the administrator to determine the ratio of the market value of assets to the actuarial accrued liability of the fund for each fiscal year.

          Limits participation in the deferred retirement option plan to those employees who become members of the system before January 1, 2012. 

          Prohibits the sale of compensatory time from being included in the calculation of overtime pay, regardless of the date that funding value of accrued assets to accrued liabilities reaches at least 100%.

Miscellaneous

          Prohibits a member in any system from receiving benefit other than a lump sum payment of member’s contributions if convicted of a felony related to professional duties.

          Contains a severability clause.

          Includes legislative findings:

        that the current structure of PSPRS, CORP and EORP does not lead to the goal of attaining 100% funded status and jeopardizes future payment of benefits to current and future retirees;

        that the current structure requires a contribution rate from employees that is too low in relation to the cost associated with the benefits required by the plan design and therefore places a greater financial burden on employers;

        that the current method of funding benefit increases decreases the probability of funds achieving an actuarially assumed earning rate and leads to greater investment risk;

        it is fundamentally unsound to provide a benefit increase during times when funded status of programs is less than 70%.  Suspension of benefit increases is intended to improve the funded status of programs to preserve future benefits; and

        to protect future benefits of retired, active and future employees it is necessary to make the changes outlined to preserve the funded status of these programs and return the programs to fiscal solvency. 

          Establishes a defined contribution study committee and charges the committee with examining the feasibility of transferring new and existing members to a new defined contribution plan.

          Becomes effective on the general effective date, with retroactive provisions as noted.

          Adds felony conviction provisions.

          Creates a Defined Contribution Study Committee.

          Requires the Committee to submit a written report on or before December 31, 2011.

Amendments

Committee on Employment and Regulatory Affairs

Arizona State Retirement System (ASRS)

          Defines contract fee for the purposes of this section as the gross amount paid to a retired member as an independent contractor minus an amount, not to exceed 10%, for an administrative fee.

          Defines gross salary for the purposes of this section as the gross amount paid to a retired member by a leasing company as salary or wages, including amounts that are subject to deferred compensation or tax shelter agreements for services rendered or that would have been paid to the retired member except for the member’s election or a legal requirement that all or part of the gross amount be used for other purposes.

          Removes the point system within ASRS.

          Establishes normal retirement eligibility in ASRS at age 65 or age 62 and 10 years of service.

          Requires employers to pay an Alternate Contribution Rate (ACR,) beginning on July 1, 2012 for retired members who perform services that would otherwise be performed by an employee of the employer.

          Requires the ACR to be assessed starting the 366th day after retirement for a member who reached normal retirement, and for a member who is an early retiree, working less than 20 weeks each year and 20 hours each week. 

          Prohibits the retired member from accruing credited service, member service, account balances, retirement benefits, LTD benefits, and the time is not eligible for later service purchase.

          Requires employers to pay the ACR on behalf of any retiree that it employs regardless of 20/20 status, direct/leasing/contracting arrangement, or whether the retiree satisfied the 12 month break in service without working on a leased or contract basis.

          Instructs the ASRS actuary to determine the ACR in an annual valuation performed by June 30th each year.

          Specifies that the ACR is calculated as the greater of 2% or two times the “deficit” payment, and calculates the ACR by adding the employer ASRS Contribution Rate to the employer LTD Contribution Rate, and then subtracting the normal cost.

          Establishes a cap on the ACR that can not be higher than the employer’s portion of the total ASRS Contribution Rate which is the Defined Benefit (DB) plus LTD.

          States that the ACR shall be payable on the compensation (for direct hire), gross salary (for leased employee), or contract fee (for independent contractor), as defined in the bill.

          Allows ASRS to determine how frequently the ACR is paid and how the monies are submitted to the ASRS.

          Specifies that late contributions will be subject to 8% interest and may be recovered in court or by state revenue offsets.

          Requires employers to submit any reports, data, paperwork or materials required by the ASRS to determine the function, utilization, efficacy or operation of the return to work program.

             Clarifies the period for which a member shall repay suspended pensions to the ASRS starts with the date the ASRS notifies the member in writing that their employment violated the statute, the date the ASRS determines the member knew or should have known that their employment violated the statute, or any other time period determined by the ASRS.

             Requires an employer that employed a member whose pension was suspended to pay the ASRS the ACR starting with the date the member returned to employment. The employer is required to make the ACR payment through the earlier of:

     The date the member terminates employment,

     The date the employer begins making the ACR payment required by the new Return to Work statute, or

     The date the member resumes active membership in the ASRS.

          Transfers the PSPRS Administrator from EORP to ASRS prospectively.

Public Safety Personnel Retirement System (PSPRS)

          Removes the second tier of contribution rates for PSPRS members who enter the system after June 30, 2012.

          Eliminates the DROP program for members with less than five years of service at the effective date of this bill.

          Permits members with five or more years of service, but less than 20 years of service on July 1, 2011 to participate in the new DROP program.

        Establishes actuarial smoothing at a rate equal to the average annual return of the system over the period of years established by the board for use in the calculation of the actuarial value of assets for the previous year, not to exceed the system’s assumed investment rate of return, but at least 2%.

        Requires employees who elect to participate in the new drop program to make employee contributions to the system in the amount equal to the rate established for the employer ACR.

        Permits employees with 20 years of service by July 1, 2011 to participate in the current drop program.

Felonies

          Requires the court to order a person’s membership terminated and the person shall forfeit all rights and benefits earned under the state retirement system or plan if the member is convicted of a class 1,2,3,4, or 5 felony that was committed in the course of the member’s employment as a public official or for a public employer.

          Stipulates that an order of forfeiting a member’s benefits on conviction of an offense shall not be stayed on the filing of any appeal of the conviction. If the conviction is reversed on final judgment, no rights or benefits shall be forfeited and the member’s membership shall be reinstated.

          Permits the court, after considering the totality of the circumstances, to award the forfeited benefits to a spouse, dependent or former spouse of a member who has been convicted of a felony. The judge must consider:

        The role, if any, of the spouse, dependent or former spouse in connection with the illegal conduct for which the person was committed.

        The degree of knowledge, if any possessed by the person’s spouse, dependent or former spouse in connection with the illegal conduct for which the person was convicted.

        The community property nature of the benefits involved.

        The extend to which the person’s spouse, dependent or former spouse was relying on the forfeited benefits.

          Prohibits a person who is subject to forfeiture as a result of a felony from becoming eligible for future membership in any state retirement system or plan.

          Requires the court to provide a copy of the order of forfeiture to the state retirement system or plan to which it applies.

          Stipulates that this section does not apply to a member whose most recent retirement occurs before the effective date of this section, unless the member has resumed making contributions in the state retirement system or plan.

          Clarifies that the felony provisions outlined in this bill apply only to the state retirement system or plan in which the person was a contributing member at the time of the offense.

Defined Contribution and Retirement Study Committee

          Establishes a Defined Contribution and Retirement Study Committee (Committee) consisting of:

     The five members of the State Board of Investment.

o       The chairperson of the State Board of Investment is the Chairperson of the study committee.

        Three members of the senate.

        Three members of the house of representatives.

        One member of the Board of Trustees of PSPRS.

        One member of the ASRS Board.

          Instructs the Committee to study:

        The feasibility and cost of transferring existing members of a public retirement system or plan to a new defined contribution plan as well as providing for a new defined contribution plan for newly hired public employees.

        The existing section 401(a) plans in statute.

        The definitions of compensation, average yearly salary, and salary.

        The advantages and disadvantages of the local board system and the agent multiple-employer public retirement system model for PSPRS and CORP.

        The practices of granting accidental and ordinary disability retirements to members in PSPRS and CORP.

          Permits the Committee to use the services of consultants, actuaries, and attorneys in performing the Committee’s duties and exempts contracts for services from the Arizona Procurement Code.

          Requires the Committee to meet at least twice in 2011.

          Requires the Committee to submit an interim report on or before December 31, 2011.

          Requires the Committee to submit a final repots with its recommendations and findings on or before December 31, 2012.

Miscellaneous Changes

          Restricts prospectively, the purchase of credited service to military call up or in-state service only. This change applies ASRS, PSPRS, CORP and EORP.

          Permits the legislature to enact permanent one-time increases in retirement benefits for PSPRS, CORP and EORP after December 31, 2015 following an analysis of the effect on the plan by the Joint Legislative Budget Committee (JLBC.)

        Requires JLBC to analyze the effect of the permanent benefit increase on the funded status of the plan based on the following criteria:

o       The funded status of the plan.

o       The length of time since the last increase.

o       The increase in the cost of living since the last increase.

o       The current economic condition of this state.

o       Recent investment performance of the plan.

o       The overall view of the economy and market.

o       The total cost of the increase to the plan.

          Removes conflicting felony language.

          Strikes legislative findings from the underlying bill and inserts new legislative findings language.

          Changes the crime of knowingly making a false statement or falsifying documents with the intent to defraud the system from a class six to a class five felony for PSPRS and CORP.

          Permits members of PSPRS, CORP, and EORP who receive a refund and subsequently become reemployed as an elected official to redeposit the amount withdrawn plus interest into the fund.

        Stipulates that a member who redeems prior service pursuant to statute is subject to the benefits and duties in effect at the time of the member’s most recent reemployment.

          Provides ASRS with rulemaking authority to implement the ACR.

          States that the legislature’s intent in establishing the ACR for all four systems is to mitigate the potential actuarial impact that a retired member who returns to work for an employer may have on the system or plan.

          Appropriates $250,000 from the ASRS administration account in FY 2011-2012 to the ASRS system for the administrative implementation of this act.

        Exempts the appropriation from the lapsing of appropriations.

          Appropriates $50,000 from the ASRS administration account in FY 2011-2012 to the state treasurer for the purpose of implementing the duties of the Committee.

        Exempts the appropriation from the lapsing of appropriations.

          Appropriates $50,000 from the PSPRS system in FY 2011-2012 to the state treasure for the purpose of implementing the duties of the Committee.

        Exempts the appropriation from the lapsing of appropriations.

          Stipulates that all monies remaining unexpended and unencumbered on September 30, 2013 from the appropriations made to the Committee shall revert respectively to ASRS and PSPRS.

          Contains and emergency clause.