Arizona State Retirement System July 28, 2011 Arizona City/County Management Association Estimates are utilized

Arizona StateRetirement System

Arizona State Retirement System

July 28, 2011

Arizona City/County Management Association

Estimates are utilized


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ASRS Statistics (June 30, 2010)

Total membership approximately 525,000

Appropriated FY2011 Budget $24.7 million

Not a State General Fund Budget

Annual distributions $2.3 billion

Annual contributions $1.7 billion

Employee pays 50% of all costs

Average annual retirement benefit: $19,840

Average years of service of retiree: 19.5

Average age of retiree: 69.4 years

Arizona StateRetirement System ASRS Provided

Programs

1. Defined Benefit Pension Plan

2. Health Insurance Program & Supplement

3. Hybrid Retirement Plan “System”

4. Long Term Disability Program

5. Supplemental Savings Plans

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Forms of Retirement Plan

What is a “Defined Benefit” (DB) Retirement Plan? A form of retirement plan where retirement benefits can be

determined ahead of time and is based upon a known formula. Social Security, Military Pensions and the ASRS are examples of Defined Benefit retirement plans.

What is a “Defined Contribution” (DC) Retirement Plan? A form of retirement plan where the retirement benefits are not

known ahead of time and are based upon contributions made, investment returns realized, and expenses paid. 401(k)s and IRAs are examples of Defined Contribution retirement plans.


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DB Plan & DC Plan Comparison

Defined Benefit Defined Contribution

+ Guaranteed lifetime benefit + Less complex

+ Predictability of future retirement benefit + More portable

+ Greater retirement equity+/- Individualized

investment decision making

+ Less Expensive per benefit level +/- All risk held by employee

Arizona StateRetirement System Why are Large DBs

Typically Less Expensive?

DB typically results in lower cost per level of retirement benefit because:

DB typically has higher rates of return Professional asset allocation Greater time horizon and risk tolerance Greater diversification

DB participants need not plan for outliving assets Therefore less savings required

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Funding Models

Pre-Funding Build up investment portfolio equal to accrued liabilities

Pay-As-You-Go Build up investment portfolio only as a liquidity buffer


Valuation Methods

Measuring Assets: Minor differences in “marked-to-market” methods

Private investments Illiquid public investments International investments

Significant differences in “smoothing” methods Length of period of smoothing Allowable spread between “smoothed” value and “marked-to-

market” value.

Measuring Liabilities: Minor differences in demographic assumptions Modest differences in valuation methodologies Significant differences in discounting methodologies

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Public Fund Survey: Plan Funded Statuses

90 92 94 96 98 00 01 02 03 04 05 06 07 08 09

79.0

82.0

85.086.0

89.0

96.0

101.3

97.1

91.3

87.9

86.3

85.3

86.185.0

79.8

Source: NASRA - Public Fund Survey: Summary of Findings for FY 2009


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Reasons for Recent Changes in Funded Status

Low investment returns during FYs 2001-03 and FYs 2008-09

Change from EAN to PUC (1989) Low contribution rates during 1990s+

Benefit improvements prior to 2002

Certain expensive and ineffective plan design features (most remedied)

Improving life expectancies of retirees


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Issues Past & Present

Key Plan Design Features Causing Contribution Rates to Increase

DB Plan Membership Decreases Not a Plan Design Feature Return to Work Contributions Remedy in Process Since 2008/09

Remedies Applied Service Purchase Inequities: Remedies 2004 Refund Accruals: Remedies 2004 Early Retirement Incentives: Remedies 2004 Miscellaneous: Remedies 2004+ Modified Deferred Retirement Option: Remedies 2006 Increasing Longevity: Remedies 2006, 2010 Salary Spiking: Remedies 2009, 2010 Refund Amounts: Remedies 2010

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Distribution of ASRS Pensions as of June 30, 2010

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$0 -$25,000

$25,000 - $50,000

$50,000 - $75,000

$75,000 - $100,000

$100,000 - $125,000

$125,000 - $150,000

$150,000 - $175,000

$175,000 - $200,000

$200,000 and over

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

64,756 = 68.29%

25,256 = 26.63%

4,145= 4.37%

496 = 0.52%

119 = 0.13%

34= 0.036%

13 = 0.014%

5 = 0.005%

4 = 0.004%

Average Pension$19,840.10

Average Years of Service

36.7

37.3

34.9

33.8

33.8

33.5

32.3

28.5

15.1


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ASRS Investment Asset Allocation

Investment Category Policy Target Policy Range

U.S. Fixed Income 26% 16-36%

Core 24%

High Yield 2%

U.S. Equity 40% 30-50%

Large Cap 28%

Mid Cap 6%

Small Cap 6%

International Equity 18% 8-28%

Developed Large Cap13%

Developed Small Cap 2%

Emerging Markets 3%

Private Equity 7% 5-9%

Real Estate 6% 4-8%

Inflation Linked Assets 3% 0-10%

Commodities 3% 0-5%

TIPS 0% 0-5%

Risk Parity 0% 0-5%

Absolute Return 0% 0-5%

Opportunistic 0% 0-10%

GTAA* (Included in allocation above) 10% 8-12%Green: Denotes asset classes typically absent from DC investment options.

Arizona StateRetirement System Investment Returns

(June 30, 2010)

Annualized Rates of Return

ASRS Total Fund

FYTD(12/31/2010)*

1 Year 3 Year 5 Year 10 Year Inception(7/1/1975)

Net of Investment

Fees17.7% 14.9% -4.7% 2.3% 2.4% 9.6%

Gross of Investment

Fees18.0% 15.3% -4.5% 2.5% 2.4% 9.7%

* Estimates

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Arizona StateRetirement System Defined Benefit Pension Plan

Funded Status Projections(June 30, 2010)

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Based on June 30, 2010 Projections with constant 8% Investment Return and 0% Population Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY1

2FY1

3FY1

4FY1

5FY1

6FY1

7FY1

8FY1

9FY2

0FY2

1FY2

2FY2

3FY2

4FY2

5FY2

6FY2

7FY2

8FY2

9FY3

0FY3

1FY3

2FY3

3FY3

4FY3

5FY3

6FY3

7FY3

8FY3

9FY4

0FY4

1

Actuarial Value*

* Excludes potential PBIs

Arizona StateRetirement System Health Insurance Plan

Funded Status Projections(June 30, 2010)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%FY1

2FY1

3FY1

4FY1

5FY1

6FY1

7FY1

8FY1

9FY2

0FY2

1FY2

2FY2

3FY2

4FY2

5FY2

6FY2

7FY2

8FY2

9FY3

0FY3

1FY3

2FY3

3FY3

4FY3

5FY3

6FY3

7FY3

8FY3

9FY4

0FY4

1

18Based on June 30, 2010 Projections with constant 8% Investment Return and 0% Population Growth

Actuarial Value


Defined Benefit Pension Plan Funded Status Projections(June 30, 2010)

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2

FY2

3

FY2

4

FY2

5

FY2

6

FY2

7

FY2

8

FY2

9

FY3

0

FY3

1

FY3

2

FY3

3

FY3

4

FY3

5

FY3

6

FY3

7

FY3

8

FY3

9

FY4

0

FY4

1

Market Value of Assets*

* Excludes potential PBIs

Arizona StateRetirement System Health Insurance Plan

Funded Status Projections (June 30, 2010)

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

FY25

FY26

FY27

FY28

FY29

FY30

FY31

FY32

FY33

FY34

FY35

FY36

FY37

FY38

FY39

FY40

FY41

Market Value of Assets


HBS Funding

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As of June 30, 2009 Arizona was: Better funded than any other state in the nation for health care benefits, at 69 percent. ASRS Actuarial Funded Status was 87.1%. ASRS Actuarial Funded Status was 84.2% on June 30, 2010. 1 of 2 states with greater than 50% OPEB funding (Arizona, Oregon)

4 states: 25% - 50% funded (Alaska, Ohio, North Dakota, Wisconsin) 3 states: 10% - 24% funded (Kentucky, Colorado, Utah) 39 states: 5% funded or less 1 state not reported (Nebraska)

1 of 5 states that contributed their entire actuarially required OPEB contribution for 2009

Just over 5% of OPEB liability is funded nationwide

Source: PEW Center on the States (2011). The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs.

As of June 30, 2006 AZ was: 1 of 6 states on track to fully fund OPEBs in the next 30 years 1 of 3 states with greater than 50% OPEB funding

5 states 11-41% funded 4 states 1-10% funded 33 states 0% funded (5 states not reported)

Only 3% of OPEB liability is funded nationwide

Source: PEW Center on the States (2007). Promises with a Price: Public Sector Retirement Benefits.

Arizona StateRetirement System Significant 2011

Legislative Outcomes Return to Work Alternate Contribution Rate Normal Retirement Age for New Hires (July 1, 2011) 27-week Waiting Period for New State Employees Contribution Rate Split Felony Forfeitures Service Purchase Program Limitations Defined Contribution and Retirement Study

Committee

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Reference Material

$50 Billion Tidal Wave: How Unfunded Pensions Could Overwhelm Arizona Taxpayers, Briggs, Andrew G., Goldwater Institute, 2010

A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans , National Institute on Retirement Security, 2008

A Comparative Analysis of Defined Benefit and Defined Contribution Retirement Plans with Arizona References, Matson, Paul and Dobel, Suzanne, 2006, www.azasrs.gov/web/pdf/DefinedBen_DefinedComp_WhitePaper.pdf

Arizona Public Pensions Underreport Funding Shortfalls, Riggs, Andrew, Goldwater Institute, 2010

Look Before You Leap: The Unintended Consequences of Pension Freezes, Boivie, Ilana and Almeida, Beth, National Institute on Retirement Security, 2008

Myths and Misperceptions of Defined Benefit and Defined Contribution Plans, NASRA White Paper, 2002 updated 2005

Profitable Prudence: The Case for Public Employer Defined Benefit Plans, Anderson G. and Brainard, K., Pension Research Council, Wharton School, 2004

Public Plan DB/DC Choices , Olleman, Mark, Milliman, PERiScope Publication, 2009

The Crisis in Local Government Pensions in the United States, Novy-Marx, Robert and Rauh, Joshua, 2010

Documents

Arizona State Retirement System July 28, 2011 Arizona City/County Management Association Estimates are utilized