How ASRS employees deliver service with · THE ARIZONA STATE RETIREMENT SYSTEM BOARD 3300 North Central Avenue, 10th Floor Board Room Phoenix, AZ 85012 February 23, 2018 8:30 a.m

How ASRS employees deliver service with

PROFESSIONALISM “We promote, strive for and expect individuals, teams, and divisions to possess professional quali�es and skills to lead the organiza�on”

• Friendly, respectful and courteous • Proactive and responsive• Good communicator / active listener • Trusted contributor / teammate

• Personally accountable • Subject matter expert• Critical thinker

“We appreciate individuals, teams or divisions who drive the agency forward with new, innova�ve ideas and solu�ons”IMPROVEMENT

• Promotes new ideas

• Enhances morale

• Enhances outcomes and performance

• Improves relationships

• Solves problems

EXCELLENCE “We celebrate individuals, teams and divisions who exceed expecta�ons and deliver service with a PRIDE that permeates the organiza�on”

• Surpasses expectations • Engenders a positive public image• Celebrates /rewards accomplishments and contributions of others

• Embraces change in a manner which inspires others• Promotes teamwork /collaboration through communication

“We treasure the achievements of individuals, teams, divisions and the agency that energize the organiza�on”RESULTS

• Meets goals and objectives• Satisfies customers

• Completes projects• Attains individual accomplishments

“We recognize that u�lizing di�erent talents, strengths and points of view, strengthens the agency and helps propel outcomes greater than the sum of individual contributor”DIVERSITY

• Encourages the free flow of ideas and opinions

• Treats all people with dignity and respect

• Works effectively with dissimilar individuals

ARIZONA STATE RETIREMENT SYSTEM

• Honest, fair, non-judgmental• Adaptable to change • Adhere to the Code of Conduct

• Accepts personal responsibility and challenges with enthusiasm

• Produces quality work products• Manages risks successfull

• Increases efficiency, effectiveness or reduces costs

• Recognizes and promotes new skills in others

Celebrating Sixty Five Years

1953 2018

Paul Matson Director

STATE RETIREMENT SYSTEM

3300 NORTH CENTRAL AVENUE • PO BOX 33910 • PHOENIX, AZ 85067-3910 • PHONE (602) 240-2000 4400 EAST BROADWAY BOULEVARD • SUITE 200 • TUCSON, AZ 85711-3554 • PHONE (520) 239-3100

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AGENDA

NOTICE OF COMBINED PUBLIC MEETING AND POSSIBLE EXECUTIVE SESSION OF THE ARIZONA STATE RETIREMENT SYSTEM BOARD

3300 North Central Avenue, 10th Floor Board Room

Phoenix, AZ 85012

February 23, 2018 8:30 a.m. Pursuant to A.R.S. § 38-431.02(F), notice is hereby given to the Trustees of the Arizona State Retirement System (ASRS) Board and to the general public that the ASRS Board will hold a meeting open to the public on Friday, February 23, 2018, beginning at 8:30 a.m., in the 10th Floor Board Room of the ASRS offices at 3300 N. Central Avenue, Phoenix, Arizona 85012. Trustees of the Board may attend either in person or by telephone conference call. The Chair may take public comment during any agenda item. If any member of the public wishes to speak to a particular agenda item, they should complete a “Request To Speak” form indicating the item and provide it to the Board Administrator. Pursuant to A.R.S. § 38-431.03(A)(3), the ASRS Board of Trustees may vote to go into executive session, which will not be open to the public, for the purpose of obtaining legal advice on any item on the Agenda. This meeting will be teleconferenced to the ASRS Tucson office at 4400 East Broadway Boulevard, Suite 200, Tucson, Arizona 85711. The conference call to Tucson will be disconnected after 15 minutes if there are no attendees in the Tucson audience. The Agenda for the meeting is as follows: 1. Call to Order; Roll Call; Opening Remarks .............................................. Mr. Kevin McCarthy

Chair 2. Approval of the Minutes of the December 1, 2017 Public Meeting of the ASRS Board

(estimated time:1 minute) ....................................................................... Mr. Kevin McCarthy 3. Presentation, Discussion, and Appropriate Action Regarding the ASRS 2018 Legislative

Initiatives and Legislative Update (estimated Time: 15 minutes) ........... Ms. Jessica Thomas Government Relations Officer

http://www.azasrs.gov/

Board Meeting Agenda February 23, 2018 Page 2 of 3 4. Presentation, Discussion, and Appropriate Action Regarding the ASRS Investment

Program Updates (estimated time: 20 minutes) .......................................... Mr. Paul Matson ................................................................................................................................. Director ....................................................................................................................... Mr. Karl Polen Chief Investment Officer a. ASRS Fund Positioning b. IMD Investment House Views c. IMD Projects, and Asset Class Committee (ACC) Activities d. MSCI Risk Report

5. Presentation, Discussion, and Appropriate Action Regarding the Allocation and Distribution

Method of Retrospective Rate Agreement (RRA) Funds (estimated time: 20 minutes) .......... .................................................................................................................... Mr. Paul Matson

6. Presentation, Discussion, and Appropriate Action Regarding the Role and Duties of Internal Audit and the Hiring Process for Chief Internal Auditor (estimated time: 15 minutes) ............. .................................................................................................................... Mr. Paul Matson ............................................................................................................. Mr. Anthony Guarino

Deputy Director and Chief Operations Officer

7. Presentation, Discussion, and Appropriate Action Regarding Director's Report as well as Current Events (estimated time: 5 minutes) ................................................. Mr. Paul Matson ............................................................................................................. Mr. Anthony Guarino

a. 2017 Compliance Report b. 2017 Operations Report c. 2017 Budget and Staffing Reports d. 2017 Cash Flow Statement e. 2017 Appeals Report f. 2017 Employers Reporting

8. Presentation and Discussion Regarding Informational Updates from Prior and Upcoming Committee Meetings (estimated time: 15 minutes)

a. Operations, Audit and Legislative Committee (OALC) .............. Mr. Clark Partridge, Chair ....................................................................................................... Mr. Anthony Guarino The next OALC Meeting will be held on April 4, 2018.

b. Investment Committee (IC) ........................................... Mr. Clark Partridge, Acting Chair ................................................................................................................. Mr. Karl Polen The next IC Meeting is scheduled for March 16, 2018.

c. Appeals Committee (AC) ..............................................................Mr. Tom Manos, Chair ....................................................................................................... Mr. Anthony Guarino The next AC Meeting is scheduled for April 10, 2018.

9. Board Requests for Future Agenda Items (estimated time: 1 minute) ..... Mr. Kevin McCarthy

10. Call to the Public ..................................................................................... Mr. Kevin McCarthy

Board Meeting Agenda February 23, 2018 Page 3 of 3 Those wishing to address the ASRS Board are required to complete a Request to Speak

form before the meeting indicating their desire to speak. Request to Speak forms are available at the sign-in desk and should be given to the Board Administrator. Trustees of the Board are prohibited by A.R.S. § 38-431.01(H) from discussing or taking legal action on matters raised during an open call to the public unless the matters are properly noticed for discussion and legal action. As a result of public comment, the Board may direct staff to study and/or reschedule the matter for discussion and decision at a later date.

11. The next regular public ASRS Board meeting is scheduled for Friday, April 27, 2018, at 8:30 a.m., at 3300 N. Central Avenue, in the 10th Floor Board Room, Phoenix, Arizona.

The Board will take a 15 minute recess while the meeting moves to the 14th floor conference room, where the balance of the meeting will take place. 12. Presentation, Discussion, and Appropriate Action Regarding the Board Governance

Evaluations ............................................................................................ Mr. Kevin McCarthy a) Trustees’ 2017 Self-Evaluation b) Board 2017 Self-Evaluation c) Key issues in 2017 d) Focus areas for 2018

13. Adjournment of the ASRS Board. A copy of the agenda background material provided to Board Trustees (with the exception of material relating to possible executive sessions) is available for public inspection at the ASRS offices located at 3300 North Central Avenue, 14th Floor, Phoenix, Arizona and 4400 East Broadway Boulevard, Suite 200, Tucson, Arizona. The agenda is subject to revision up to 24 hours prior to meeting. These materials are also available on the ASRS website (https://www.azasrs.gov/content/board-and-committee-meetings) approximately 48 hours prior to the meeting.

Persons with disabilities may request a reasonable accommodation such as a sign language interpreter or alternate formats of this document by contacting Tracy Darmer, ADA Coordinator at (602) 240-5378 in Phoenix, at (520) 239-3100, ext. 5378 in Tucson, or 1-800-621-3778, ext. 5378 outside metro Phoenix or Tucson. Requests should be made as early as possible to allow time to arrange the accommodations. Dated February 16, 2018 ARIZONA STATE RETIREMENT SYSTEM Signed Copy on File Signed Copy on File Alicia Guzman Paul Matson Board Administrator Director

https://www.azasrs.gov/content/board-and-committee-meetings

Agenda Item #2




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MINUTES PUBLIC MEETING

ARIZONA STATE RETIREMENT SYSTEM BOARD

Friday, December 1, 2017 8:30 a.m.

The Arizona State Retirement System (ASRS) Board met in the 10th Floor Board Room of the ASRS Office, 3300 N. Central Avenue, Phoenix, Arizona 85012. Mr. Kevin McCarthy, Chair of the ASRS Board, called the meeting to order at 8:30 a.m. The meeting was teleconferenced to the ASRS office at 4400 E. Broadway, Tucson, Arizona 85711. 1. Call to Order; Roll Call; Opening Remarks Present: Mr. Kevin McCarthy, Chair Mr. Michael Miller

Mr. Clark Partridge Mr. Jim Hillyard Mr. Michael Lofton Mr. Mr. Rene Guillen (Joined the meeting at 8:31 a.m.)

Absent: Mr. Tom Manos, Vice-chair Two vacant positions. A quorum was present for the purpose of conducting business. 2. Approval of the Minutes of the October 27, 2017 Public Meeting of the ASRS

Board. Motion: Mr. Michael Lofton moved to approve the minutes of the October 27, 2017 Public Meeting of the ASRS Board. Mr. Jim Hillyard seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved. Mr. Rene Guillen joined the meeting at 8:31 a.m.

ASRS Board Meeting December 1, 2017 Page 2 of 6 3. Presentation, Discussion, and Appropriate Action Regarding ASRS Legislative

Initiatives and Legislative Update

Ms. Jessica Thomas, Government Relations Officer, introduced the topic by stating that at the October 27, 2017 Board meeting the Board approved the 2018 Legislative agenda. Ms. Thomas provided an update on the following ASRS legislative initiatives:

Amend A.R.S. § 38-718 to exempt all investment related services from the procurement code. Ms. Thomas has worked closely with staff at ADOA and the State Procurement Office as well as reaching out to the Attorney General’s Office to amend the language of the statute as of the last Board meeting on October 27. The new language states that the Board may enter into a contract utilized directly for investment related services for the purpose of exercising the investment responsibilities described in this article and article 2.1.The new language has also removed reference to A.R.S. § 35-214 and A.R.S. § 38-511. Amend A.R.S. § 38-751 to include information about how the Non-Participating Employer Liability is calculated and charged and to whom it is assessed. The language of subsection A of this bill has been amended to exempt particularly the state, as well as charter schools from the statute. Subsection A-B was also amended to clarify that the reduction in employees does not include employees who are participating in another state retirement plan. The ASRS is currently working with Legislative staff to obtain a sponsor for this bill.

Ms. Thomas stated that the last two initiatives of the 2018 Legislative agenda have not been amended since the last Board meeting on October 27. The two bills are as follows:

Amend A.R.S. § 38-701(6) to allow the Governor’s Office to name any state agency as the state social security administration. Amend A.R.S. § 38-871 to reorganize Deferred Compensation Committee members and responsibilities

Ms. Thomas stated the two bills have been presented to Representative Livingston who has tentatively agreed to sponsor them. She concluded by noting the ASRS is currently working with Legislative Council to open the bill folders. 4. Presentation, Discussion, and Appropriate Action Regarding the ASRS

Investment Program Updates

Mr. Karl Polen, Chief Investment Officer opened the topic by providing the fiscal year to date returns of approximately 6% and total assets of approximately $39.2 billion. He noted that total fund positioning reflects caution about the potential impact of rising rates and is therefore overweight credit, underweight rates and slightly underweight real estate. The slight overweight in equities is due to outsize returns in equities and that overweight may be trimmed in coming months in light of stretched valuations. Mr. Polen then noted that one year returns for the period ended September 30 were 13.95%, which is 49bp higher than

ASRS Board Meeting December 1, 2017 Page 3 of 6 the ASRS benchmark. The performance compared to benchmark improved 60bp compared to the prior quarter primarily due to improvements in the equity portfolio compared to the prior period, which underperformed after the Brexit vote. Mr. Polen reported that the fund continues to benefit from outperformance in its private debt, public fixed income and real estate portfolios. He then noted that ASRS is proceeding with changes in its public equity portfolio to defund active managers and replace them with style factor based approaches, which are expected to contribute to excess performance relative to the benchmark, and which can be implemented at much lower cost. Finally, Mr. Polen noted that the risk report from MSCI showed that ASRS risk is closely tracking the benchmark portfolio noting that the recent uptick in the measured risk of the portfolio is not due to any portfolio actions, but simply changes in the market. Mr. Polen then responded to questions from the Board relating to public equity changes as they relate to active management.

5. Presentation, Discussion, and Appropriate Action Regarding the ASRS Comprehensive Annual Financial Report (CAFR) for Fiscal Year 2017

Mr. Jason Ostroski, CPA, CliftonLarsonAllen Audit Manager, introduced himself to the Board and spoke on behalf of CliftonLarsonAllen, LLP, the ASRS’ external auditor. Mr. Ostroski presented an unmodified Independent Auditor’s Opinion for the fiscal year ending June 30, 2017, on the ASRS financial statements that collectively comprise the ASRS’ financial statements in the CAFR. Mr. Ostroski noted an addition to this year’s auditors report is the GASB 74, which relates to the Health Care Plans. Regarding the Independent Auditors’ Report on Internal Control Mr. Ostroski reported there were no material weaknesses or significant deficiencies identified during the audit. Mr. Ostroski further noted the requirements and standards of GASB 74. Additionally, Mr. Ostroski noted that the accounting estimates which are focused on alternative investments and actuarial information including the pension and the health plans were determined to be reasonable. Mr. Ostroski reported, as in the past audits, it was a pleasure to work with staff including the transition from the previous Chief Finance Officer (CFO). Further Mr. Ostroski reported no uncorrected misstatements or corrected misstatements, therefore, no adjusted journal entries were reported during the audit. Mr. McCarthy took a moment to congratulate staff on their great work. Mr. Matson then asked Ms. Erin Higbee, CFO and Mr. Jeremy Pond, Controller, to stand up so that he could recognize them as key staff members in the preparation of this audit. 6. Presentation, Discussion, and Appropriate Action Regarding the ASRS Valuations

Mr. Paul Matson opened the topic by stating the purpose of performing the ASRS valuations on a yearly basis is to measure liabilities, the funded status, and primarily to set the contribution rates. He then turned the presentation over to Mr. Ryan Falls, Actuary and Mr. Paul Wood, Actuary of Gabriel, Roeder, Smith and Company (GRS) who were in attendance and summarized the results of the 2017 ASRS valuations.

ASRS Board Meeting December 1, 2017 Page 4 of 6

a. The Pension Plan and Health Insurance Valuation GRS addressed the Board regarding the ASRS Pension Plan and Health Insurance Valuation. They presented charts summarizing the contribution rates and the funded status. The resulting contribution rate is 11.64% for each the employee and employer. This represents an increase from last year’s contribution rate of 11.34%. GRS presented their analysis including the implementation of the recommendations resulting from the Experience Study which was presented to the Board at its October 27, 2017 meeting. The resulting funded status of the Plan as of June 30, 2017 is 70.5%.

b. The System Valuation GRS provided information regarding accrued liabilities, market value of assets and funded status for the System. The resulting funded status of the System as of June 30, 2017 is 79.6%.

c. The Long Term Disability (LTD) Valuation GRS addressed the Board regarding the ASRS LTD Valuation. The resulting contribution rate is 0.16% with the experience study changes phased in, which results in no increase from the current rate, and would be 0.18% if there was no phase in. The resulting funded status of the LTD Plan as of June 30, 2017 is 80.4%.

d. Actuary’s Recommendation Regarding 13th Checks for Retired System Members

Based on the results, there will be no addition to the 13th check or supplemental credit balances.

e. The Alternate Contribution Rate (ACR) GRS addressed the Board regarding the ASRS aggregate results and Alternate Contribution Rate (ACR) which is the amount employers pay when they rehire retired ASRS members. The calculated ACR is 10.53%, consisting of 10.47% for the Plan and 0.06% for LTD. This is an increase from last year’s ACR of 9.49%.

GRS responded to questions from the Board regarding the results of the Experience Study as it relates to unfunded liability. In response to a question by Mr. Hillyard on current, past, and future expectations with respect to changes in unfunded accrued actuarial liabilities, Mr. Matson elaborated on the changes of the factors that contributed to the change in the current unfunded liability. He discussed three major factors that contributed as the changes in the mortality table, the reduction in the actuarial discount rate, and the change in actuarial methodology, in addition to the pre-funding of the PBI. Mr. McCarthy asked Mr. Matson to elaborate on the recommendations presented for the LTD program. Mr. Matson presented two options – a phased in option and a non-phased in option - with the resulting contribution rates for each the employee and the employer with regard to the LTD Program. The consensus of the Board was they agreed with the Director’s recommendation of phasing in the LTD changes resulting in a contribution rate of 0.16%. The Board expressed their appreciation to Mr. Falls and Mr. Wood for the work they put into the presentation.

ASRS Board Meeting December 1, 2017 Page 5 of 6 Motion: Mr. Clark Partridge moved to accept the following:

a. Accept the actuarial valuation report of the Plan as presented with the resulting contribution rates of 11.64% for each the employee and employer.

b. Accept the System Actuarial Valuation as presented. c. Accept the Actuarial Valuation of the LTD Program as presented and phase in the

impact of the changes consistent with the method used for the Pension Plan, with the resulting contribution rate of 0.16% for each the employee and employer.

d. Accept the Actuary’s recommendation to not provide an additional 13th check for retired system members.

Mr. Jim Hillyard seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved. 7. Presentation, Discussion, and Appropriate Action Regarding Delegating LTD

Appeals to the ASRS Board Appeals Committee Mr. Matson stated the ASRS Board has the right to delegate appeals to the Board Appeals Committee. However, the statute did not allow the Board to delegate LTD appeals to that committee. The statute has now been remedied to allow the Board to delegate LTD Appeals to the Board Appeals Committee under Article 2.1. Motion: Mr. Michael Miller moved to delegate the responsibilities added to A.R.S. § 38-714(E)(1) by Laws 2017, Chapter 105 to the ASRS Board Appeals Committee. Mr. Michael Lofton seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved. 8. Presentation, Discussion, and Appropriate Action Regarding Director’s Report as

well as Current Events

Mr. Paul Matson stated he had nothing further to add regarding the Director’s Report, but would answer any questions the Board may have regarding the report; there were none.

9. Presentation, Discussion, and Appropriate Action Regarding Board Self

Evaluation Material Distribution Mr. McCarthy announced to the members of the Board they were provided a packet with Board Evaluation information and requested they be submitted prior to January 31, 2018.

ASRS Board Meeting December 1, 2017 Page 6 of 6 10. Presentation and Discussion Regarding Informational Updates from Prior and

Upcoming Committee Meetings a. Operations, Audit and Legislative Committee (OALC) Mr. Clark Partridge announced the next OALC meeting will be held January 3, 2018.

b. Investment Committee (IC) Mr. Clark Partridge announced the next IC meeting is scheduled to be held on December 15, 2017. c. Appeals Committee (AC)

Mr. Jim Hillyard announced the next AC meeting is scheduled to be held on December 12, 2017.

11. Board Requests for Future Agenda Items No requests were made. 12. Call to the Public There were no requests made. 13. The next regular ASRS Board meeting is scheduled for Friday, February 23, 2018

at 8:30 a.m., at 3300 N. Central Avenue, 10th Floor Board Room, Phoenix, Arizona.

Mr. McCarthy noted the next Board meeting is scheduled for Friday, February 23, 2018 at 8:30 a.m. 14. Adjournment of the ASRS Board Motion: Mr. Michael Lofton moved to adjourn the December 1, 2017, Board Meeting at 9:52 a.m. Mr. Jim Hillyard seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved. Respectfully Submitted by: Alicia Guzman Board Administrator ARIZONA STATE RETIREMENT SYSTEM

Agenda Item #3




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MEMORANDUM

TO: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director Ms. Jessica Thomas, Government Relations Officer DATE: February 9, 2018 RE: Agenda Item #3: Presentation, Discussion and Appropriate Action Regarding the

ASRS 2018 Legislative Initiatives and Legislative Update Purpose To provide an update on the status of the proposed ASRS initiatives for the 2018 legislative session. Recommendation Information item only; no action required. Background During the summer, the Government Relations Officer received legislative suggestions from ASRS staff and Trustees concerning plan design issues; plan inefficiencies, inconsistencies, and inequities; administrative concerns; and others. The Government Relations Officer researched and discussed each suggestion in conjunction with Trustees, Executive Management, and other internal staff accordingly. Staff presented, and the Board approved, the proposed 2018 Legislative Agenda at the October Board meeting. An updated hard copy of the ASRS Bill Tracker will be provided at the meeting. The link to the most up-to-date bill tracker can be found any time at https://www.azasrs.gov/content/legislation. Attachments: 2018 Legislative Agenda HB2034 Social Security; State Agency Designation SB1054 ASRS; Nonparticipating Employers HB2035 Deferred Compensation Plans; Governing Committee

http://www.azasrs.gov/

https://www.azasrs.gov/content/legislation

2018 Legislative Agenda

1. Amend 38-718 to exempt all investment related services from the procurement code a. Allows the ASRS to contract for investment related services outside of the Procurement

Code b. Allows the ASRS to contract for investment related services much more simply and

quickly which is necessary in a dynamic industry c. Allows the ASRS to contract for more expert services such as due diligence on ad hoc

investments d. Allows the ASRS to contract with necessary companies and individuals such as large

investment firms and industry experts that might otherwise be unavailable

2. Amend 38-701(6) to allow the Governor’s Office to name any state agency as the state social security administration

a. The ASRS no longer requires 218 agreements b. Allows other state agencies who are better suited to carry out these duties c. Allow the Governor’s Office more flexibility in assigning the Social Security administrator

duties d. Free up more ASRS staff resources for administering the Plan

3. Amend 38-751 to include information about how the Non-Participating Employer Liability is

calculated and charged and to whom it is assessed a. Allows the ASRS to determine whether an Employer is no longer participating b. Allows the ASRS to calculate an unfunded liability for an Employer c. Allows the ASRS to manage asset fund accounts established for the unfunded liability of

Employers

4. Amend 38-871 to reorganize Deferred Compensation Committee members and responsibilities a. Changes the Board composition to allow for more members with expert experience b. Allows the Board more flexibility in administering its duties c. Simplifies language.

- i -

PREFILED DEC 14 2017 REFERENCE TITLE: social security; state agency designation

State of Arizona House of Representatives Fifty-third Legislature Second Regular Session 2018

HB 2034

Introduced by Representative Livingston

AN ACT AMENDING SECTION 38-701, ARIZONA REVISED STATUTES; RELATING TO SOCIAL SECURITY.

(TEXT OF BILL BEGINS ON NEXT PAGE)

HB 2034

- 1 -

Be it enacted by the Legislature of the State of Arizona: 1 Section 1. Section 38-701, Arizona Revised Statutes, is amended to 2

read: 3 38-701. Definitions 4 In this article, unless the context otherwise requires: 5 1. "Commissioner of social security" includes any individual to 6

whom the commissioner of social security has delegated any of the 7 commissioner's functions under the social security act with respect to 8 coverage under the act of employees of states and their political 9 subdivisions. 10

2. "Employee" means any person in the employ of this state or a 11 political subdivision of this state and includes an elective or appointive 12 officer of this state or an eligible political subdivision of this state. 13

3. "Employment" means any service performed by an employee in the 14 employ of this state or a political subdivision of this state, for the 15 employer, except service that in the absence of an agreement entered into 16 under this article would constitute "employment" as defined in the social 17 security act, or service that under the social security act may not be 18 included in an agreement between this state and the commissioner of social 19 security entered into under this article. 20

4. "Political subdivision" includes counties, incorporated cities 21 or towns and school districts in this state, and any other political 22 subdivision as defined in article XIII, section 7, Constitution of 23 Arizona. 24

5. "Social security act" means the federal social security act (42 25 United States Code chapter 7), including regulations and requirements 26 issued pursuant to that act. 27

6. "State agency" means the Arizona state retirement system board 28 established pursuant to section 38-713 STATE AGENCY THAT IS DESIGNATED BY 29 THE GOVERNOR TO SERVE AS THE SOCIAL SECURITY ADMINISTRATOR FOR THIS STATE 30 UNDER THE FEDERAL OLD AGE AND SURVIVORS INSURANCE SYSTEM. 31

Sec. 2. Retention of rules 32 All rules adopted by the Arizona state retirement system board 33

pursuant to section 38-704, Arizona Revised Statutes, remain in full force 34 until amended by the state agency that is designated by the governor to 35 serve as the social security administrator for this state. 36

- i -

PREFILED JAN 03 2018 REFERENCE TITLE: ASRS; nonparticipating employers

State of Arizona Senate Fifty-third Legislature Second Regular Session 2018

SB 1054

Introduced by Senator Fann

AN ACT AMENDING SECTION 38-751, ARIZONA REVISED STATUTES; RELATING TO THE ARIZONA STATE RETIREMENT SYSTEM.


SB 1054

- 1 -


read: 3 38-751. Nonparticipatory employer liability allocation; 4

definitions 5 A. ASRS shall allocate a liability to ESTABLISH A SEPARATE FUND FOR 6

an employer OTHER THAN THIS STATE OR A CHARTER SCHOOL that is: 7 1. No longer participating in ASRS if that nonparticipation is 8

based on AS A RESULT OF any of the following: 9 1. (a) The character of the employer changes from a public entity 10

to a private entity. 11 2. An employer, other than this state or a charter school, files 12

for bankruptcy or otherwise dissolves. 13 3. An employer is no longer participating. 14 4. For this state, the character of a state agency, board or 15

commission changes from public to private. 16 B. ASRS shall determine the schedule and method of payment of the 17

allocated liability. 18 C. The liability allocated to an employer under this section is 19

equal to the sum of the following: 20 1. The plan employer actuarial accrued liability multiplied by the 21

plan total deficit percentage. 22 2. The LTD program employer actuarial accrued liability multiplied 23

by the LTD program total deficit percentage. 24 (b) AN EMPLOYER DISSOLVES. 25 (c) THROUGH LEGISLATIVE ACTION, THE EMPLOYER IS NO LONGER ENROLLING 26

NEW EMPLOYEES IN ASRS OR NO LONGER CONTRIBUTING TO ASRS ON BEHALF OF 27 CURRENT EMPLOYEES OR GROUPS OF EMPLOYEES WHO OTHERWISE WOULD BE ELIGIBLE 28 FOR ASRS MEMBERSHIP. 29

2. BASED ON THE NUMBER OF CONTRIBUTING EMPLOYEES AS OF THE 30 EFFECTIVE DATE OF THIS AMENDMENT TO THIS SECTION BOTH OF THE FOLLOWING 31 APPLY: 32

(a) CONSIDERED TO EMPLOY A MINIMUM OF FIFTY EMPLOYEES AS OF ONE 33 YEAR PRECEDING THE EMPLOYER'S NONPARTICIPATION DATE. 34

(b) IS NO LONGER PARTICIPATING IN ASRS AS A RESULT OF REDUCING THE 35 NUMBER OF ACTIVELY CONTRIBUTING EMPLOYEES BY THIRTY PERCENT OR MORE OVER A 36 THREE-YEAR PERIOD OR BY FIFTY PERCENT OR MORE OVER ANY PERIOD OF TIME BY 37 FILLING A POSITION ORDINARILY FILLED BY AN EMPLOYEE OF THE EMPLOYER WITH 38 AN EMPLOYEE WHO IS NOT OTHERWISE ACTIVELY CONTRIBUTING, UNLESS THE 39 EMPLOYEE PARTICIPATES IN ANOTHER ARIZONA RETIREMENT PLAN SPECIFIED IN 40 ARTICLE 3, 4 OR 6 OF THIS CHAPTER, OR AN OPTIONAL RETIREMENT PLAN 41 SPECIFIED IN TITLE 15, CHAPTER 12, ARTICLE 3 OR CHAPTER 13, ARTICLE 2. 42

SB 1054

- 2 -

B. FOR A NONPARTICIPATING EMPLOYER DESCRIBED IN SUBSECTION A OF 1 THIS SECTION, ASRS SHALL ALLOCATE AN ACTUARIAL ACCRUED LIABILITY AND A 2 DESIGNATED ASSET AMOUNT TO THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND 3 AS OF THE NONPARTICIPATION DATE, WHICH SHALL BE CALCULATED AS FOLLOWS: 4

1. THE ACTUARIAL ACCRUED LIABILITY SHALL EQUAL THE SUM OF THE PLAN 5 EMPLOYER ACTUARIAL ACCRUED LIABILITY AND THE LTD PROGRAM EMPLOYER 6 ACTUARIAL ACCRUED LIABILITY. ACTUARIAL ACCRUED LIABILITY SHALL BE 7 CALCULATED BASED ON THE SAME ACTUARIAL ASSUMPTIONS AND METHODS AS THE 8 ACTUARIAL VALUATION PERFORMED IMMEDIATELY PRECEDING THE NONPARTICIPATING 9 EMPLOYER'S NONPARTICIPATION DATE. 10

2. THE DESIGNATED ASSET AMOUNT SHALL EQUAL THE SUM OF THE 11 FOLLOWING: 12

(a) THE PLAN EMPLOYER ACTUARIAL ACCRUED LIABILITY MULTIPLIED BY THE 13 PLAN FUNDED PERCENTAGE. 14

(b) THE LTD PROGRAM EMPLOYER ACTUARIAL ACCRUED LIABILITY MULTIPLIED 15 BY THE LTD PROGRAM FUNDED PERCENTAGE. 16

C. ALL MONIES AND SECURITIES TRANSFERRED TO THE NONPARTICIPATING 17 EMPLOYER'S SEPARATE FUND SHALL BE CREDITED TO THAT FUND. A RECORD OF THE 18 MARKET VALUE AND THE COST VALUE OF SUCH TRANSFERRED CONTRIBUTIONS SHALL BE 19 MAINTAINED FOR ACTUARIAL AND INVESTMENT PURPOSES. ASRS SHALL MAKE ALL 20 DECISIONS REGARDING THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND. 21

D. AFTER ESTABLISHING THE NONPARTICIPATING EMPLOYER'S SEPARATE 22 FUND, THE FUND SHALL BE ADJUSTED FOR ALL OF THE FOLLOWING: 23

1. ALL CONTRIBUTIONS MADE BY EMPLOYEES OF THE NONPARTICIPATING 24 EMPLOYER. 25

2. ALL CONTRIBUTIONS MADE BY THE NONPARTICIPATING EMPLOYER. 26 3. ALL PLAN, LTD PROGRAM AND ANY OTHER BENEFITS PAID TO THE 27

NONPARTICIPATING EMPLOYER'S MEMBERS WHO ARE ACTIVE, INACTIVE, RETIRED OR 28 ON LONG-TERM DISABILITY. 29

4. ALL PLAN, LTD PROGRAM AND ANY OTHER BENEFITS PAID TO THE 30 SURVIVORS OF THE NONPARTICIPATING EMPLOYER'S MEMBERS. 31

5. THE APPLICABLE SHARE OF THE INVESTMENT GAINS AND LOSSES. 32 6. EXPENSES ASSOCIATED WITH THE ADMINISTRATION OF THE 33

NONPARTICIPATING EMPLOYER'S SEPARATE FUND, INCLUDING ANY ADMINISTRATIVE, 34 DEVELOPMENT, ACTUARIAL, LEGAL, CUSTODIAL AND INVESTMENT MANAGEMENT COSTS 35 ASSOCIATED WITH THE FUND. THESE EXPENSES SHALL BE PAID DIRECTLY BY THE 36 NONPARTICIPATING EMPLOYER OR INCLUDED IN THE EMPLOYER'S LIABILITY FOR THE 37 PURPOSES OF DETERMINING THE EMPLOYER'S CONTRIBUTION RATE. 38

E. AFTER ESTABLISHING THE NONPARTICIPATING EMPLOYER'S SEPARATE 39 FUND, THE NONPARTICIPATING EMPLOYER AND ANY EMPLOYEES OF THAT EMPLOYER WHO 40 ARE ENROLLED IN ASRS SHALL CONTINUE TO HAVE CONTRIBUTION REQUIREMENTS TO 41 THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND. THE CONTRIBUTION 42 REQUIREMENTS SHALL BE CALCULATED AS FOLLOWS: 43

1. ALL EMPLOYEES OF THE NONPARTICIPATING EMPLOYER WHO ARE ENROLLED 44 IN ASRS SHALL CONTINUE TO MAKE CONTRIBUTIONS THROUGH PAYROLL DEDUCTIONS 45

SB 1054

- 3 -

BASED ON THE CONTRIBUTION RATE DETERMINED FOR THE EMPLOYEES OF 1 PARTICIPATING EMPLOYERS OF ASRS PURSUANT TO SECTION 38-736. 2

2. THE NONPARTICIPATING EMPLOYER SHALL CONTINUE TO MAKE 3 CONTRIBUTIONS THROUGH LUMP SUM PAYMENTS IN ACCORDANCE WITH SECTION 38-735, 4 EQUAL TO THE SUM OF: 5

(a) CONTRIBUTIONS OWED THROUGH PAYROLL DEDUCTIONS BASED ON THE 6 CONTRIBUTION RATE DETERMINED FOR PARTICIPATING EMPLOYERS PURSUANT TO 7 SECTION 38-737. 8

(b) THE AMOUNT REQUIRED TO AMORTIZE THE PAST SERVICE FUNDING 9 REQUIREMENT IN THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND OVER A PERIOD 10 THAT IS DETERMINED BY THE BOARD AND CONSISTENT WITH GENERALLY ACCEPTED 11 ACTUARIAL STANDARDS. IN DETERMINING THE PAST SERVICE FUNDING PERIOD, THE 12 BOARD SHALL SEEK TO IMPROVE THE FUNDED STATUS WHENEVER THE 13 NONPARTICIPATING EMPLOYER'S SEPARATE FUND IS LESS THAN ONE HUNDRED PERCENT 14 FUNDED. 15

F. THE ASRS ACTUARY SHALL DETERMINE THE ACTUARIAL ASSUMPTIONS USED 16 TO DETERMINE THE CONTRIBUTION REQUIREMENTS FOR THE NONPARTICIPATING 17 EMPLOYER UNDER SUBSECTION E OF THIS SECTION. NOTWITHSTANDING SECTION 18 38-737, THE CONTRIBUTION FOR THE NONPARTICIPATING EMPLOYER MAY NOT BE 19 DETERMINED AS A PERCENTAGE OF COMPENSATION DUE TO THE ANTICIPATED DECLINE 20 OF COMPENSATION FOR EMPLOYEES OF THE NONPARTICIPATING EMPLOYER 21 PARTICIPATING IN ASRS. THE NONPARTICIPATING EMPLOYER SHALL CERTIFY ON 22 EACH PAYROLL THE AMOUNT TO BE CONTRIBUTED AND SHALL REMIT THAT AMOUNT TO 23 ASRS AT A RATE THAT IS CONSISTENT WITH THE RATE PAID BY THE PARTICIPATING 24 EMPLOYERS. EACH FISCAL YEAR, AMOUNTS THAT ARE NOT REMITTED THROUGH 25 PAYROLL CONTRIBUTIONS PURSUANT TO THIS SECTION SHALL BE INVOICED TO THE 26 EMPLOYER AND SHALL BE PAID WITHIN THE SAME FISCAL YEAR THE 27 NONPARTICIPATING EMPLOYER IS INVOICED. 28

D. G. This section does not permit an employer to alter the 29 irrevocable agreement approved by the board under section 38-729. 30

H. FOR THE PURPOSES OF CALCULATING AN EMPLOYER'S LIABILITY UNDER 31 THIS SECTION, MEMBERS WHO ARE ACTIVE, INACTIVE, RETIRED OR ON LONG-TERM 32 DISABILITY ARE CONSIDERED EMPLOYEES OF THE NONPARTICIPATING EMPLOYER IF 33 THE MEMBER'S MOST RECENT EMPLOYER WAS THE NONPARTICIPATING EMPLOYER AS OF 34 THE NONPARTICIPATION DATE. 35

I. AN EMPLOYER THAT IS NO LONGER PARTICIPATING PURSUANT TO THIS 36 SECTION IS NOT ELIGIBLE TO PARTICIPATE IN ASRS AFTER THE EMPLOYER'S 37 NONPARTICIPATION DATE. 38

E. J. For the purposes of this section: 39 1. "LTD program" means the program established by article 2.1 of 40

this chapter. 41 2. "LTD program employer actuarial accrued liability" means the 42

value of all of the employer's open LTD program claims as of the 43 nonparticipation date plus the value of any LTD program claims that 44 employees of the employer file within twenty-four months after the 45

SB 1054

- 4 -

nonparticipation date and that are approved by ASRS ACTUARIAL ACCRUED 1 LIABILITY FOR THE EMPLOYER'S ACTIVE AND INACTIVE MEMBERS AND THE OPEN LTD 2 PROGRAM CLAIMS FOR THE EMPLOYEES OF THE EMPLOYER AS OF THE 3 NONPARTICIPATION DATE. 4

3. "LTD program total deficit FUNDED percentage" means the total 5 LTD program actuarial accrued liabilities minus the total market value of 6 LTD program assets divided by the total LTD program actuarial accrued 7 liabilities, as of the actuarial valuation performed immediately preceding 8 the nonparticipation date. If the percentage is less GREATER than zero 9 ONE HUNDRED PERCENT, the LTD program total deficit FUNDED percentage is 10 zero ONE HUNDRED PERCENT. 11

4. "Nonparticipation date" means the date on which the employer is 12 no longer participating in ASRS. 13

5. "Plan" means the retirement plan established by this article. 14 6. "Plan employer actuarial accrued liability" means the plan's 15

actuarial accrued liability for all benefits provided under this article, 16 including benefits established in section 38-783, for the employer's 17 active, inactive or retired members as of the actuarial valuation 18 performed immediately preceding the nonparticipation date. 19

7. "Plan total deficit FUNDED percentage" means the plan's TOTAL 20 MARKET VALUE OF ASSETS DIVIDED BY THE PLAN'S actuarial accrued liability 21 for all benefits provided under this article, including benefits 22 established in section 38-783, for all active, inactive or retired members 23 minus the market value of total plan assets divided by the plan's 24 actuarial accrued liability for all benefits provided under this article, 25 including benefits established in section 38-783, for all active, inactive 26 or retired members as of the actuarial valuation performed immediately 27 preceding the nonparticipation date. If the percentage is less GREATER 28 than zero ONE HUNDRED PERCENT, the plan total deficit FUNDED percentage is 29 zero ONE HUNDRED PERCENT. 30

- i -

PREFILED DEC 14 2017 REFERENCE TITLE: deferred compensation plans; governing committee

State of Arizona House of Representatives Fifty-third Legislature Second Regular Session 2018

HB 2035

Introduced by Representative Livingston

AN ACT AMENDING SECTIONS 38-715, 38-871 AND 38-872, ARIZONA REVISED STATUTES; RELATING TO DEFERRED COMPENSATION PLANS.


HB 2035

- 1 -


read: 3 38-715. Director; powers and duties 4 A. The board shall appoint a director. The director shall serve at 5

the pleasure of the board. 6 B. The director shall appoint a deputy director and assistant 7

directors with the approval of the board. 8 C. The director, under the supervision of the board, shall: 9 1. Administer this article. 10 2. Be responsible for the recruitment, hiring and day-to-day 11

management of employees. 12 3. Prescribe procedures to be followed by members and their 13

beneficiaries in filing applications for benefits. 14 4. Prescribe procedures to be followed by employers for remitting 15

data and monies to ASRS and for receiving data and monies from ASRS. 16 5. Be responsible for: 17 (a) Income and the collection of income and the accuracy of all 18

expenditures. 19 (b) Maintaining books and maintaining and processing records 20

of ASRS. 21 (c) Providing continuing education programs for the board to keep 22

the board members informed of current issues and information needed to 23 carry out their duties. 24

6. Perform additional powers and duties as may be prescribed by the 25 board and delegated to the director. 26

D. The director, under the supervision and approval of the board, 27 may: 28

1. Delegate duties and responsibilities to such state departments 29 as the director deems feasible and desirable to administer this article. 30

2. Appoint a custodian for the safekeeping of all investments owned 31 by ASRS and register stocks, bonds and other investments in the name of a 32 nominee. 33

3. Establish one or more reserve holding accounts, into which the 34 board shall close periodically the account balances of inactive accounts. 35 If any person files a claim and furnishes proof of ownership of any 36 amounts in any inactive account, the claim shall be paid from the reserve 37 holding account on the same basis as if no action had been taken under 38 this paragraph. Interest and supplemental credits shall be allocated to 39 each reserve holding account on June 30 of each year, as determined by the 40 board. For the purposes of this paragraph, "inactive account" means an 41 account to which contributions have not been paid for six months or more. 42

HB 2035

- 2 -

4. Make retirement under this article effective retroactively to on 1 or after the day following the date employment is terminated if the member 2 was unable to apply before the retroactive effective date through no fault 3 of the member. 4

E. For current or prospective employees of ASRS, the director, 5 under the supervision of the board, may: 6

1. Conduct criminal records checks. The director may require a 7 current or prospective employee to submit a full set of fingerprints to 8 the department of public safety for the purpose of obtaining a state and 9 federal criminal records check pursuant to section 41-1750 and Public Law 10 92-544. The department of public safety may exchange this fingerprint 11 data with the federal bureau of investigation. 12

2. Conduct credit checks for accounting, investment and other 13 finance-related positions. The director shall establish a policy for 14 conducting credit checks on a current employee that includes the method 15 for determining when a credit check may be conducted, retaining records 16 relating to the reason for the credit check and notifying an employee of 17 the credit check and the result of the credit check. 18

F. The director, under supervision of the governing committee for 19 tax deferred annuity and deferred compensation plans, may hire and 20 supervise employees and obtain services the director deems necessary to 21 administer article 5 of this chapter. The tax deferred annuity and 22 deferred compensation programs PLANS established pursuant to article 5 of 23 this chapter shall bear the costs for these employees and services. 24

G. The director and all persons employed by the director are 25 subject to section 38-611 and title 41, chapter 4, article 4. 26

H. In consultation with the director of the department of 27 administration, the board may enter into employment agreements and 28 establish the terms of those agreements with persons holding any of the 29 following ASRS positions: 30

1. Director. 31 2. Deputy director. 32 3. Chief investment officer. 33 4. Fiduciary or investment counsel. 34 Sec. 2. Heading change 35 The article heading of title 38, chapter 5, article 5, Arizona 36

Revised Statutes, is changed from "TAX DEFERRED ANNUITY AND DEFERRED 37 COMPENSATION PROGRAMS" to "DEFERRED COMPENSATION PLANS". 38

Sec. 3. Section 38-871, Arizona Revised Statutes, is amended to 39 read: 40

38-871. Deferred compensation governing committee; members; 41 powers and duties 42

A. A THE governing committee for tax deferred annuity and deferred 43 compensation plans is established that consists of the following seven 44 members: 45

HB 2035

- 3 -

1. Three employees of the state MEMBERS WHO ARE appointed by the 1 governor AND WHO ARE EITHER OF THE FOLLOWING: 2

(a) INDIVIDUALS WHO HAVE AN ACCOUNT BALANCE IN A DEFERRED 3 COMPENSATION PLAN THAT IS OVERSEEN BY THE GOVERNING COMMITTEE. THESE 4 INDIVIDUALS MAY BE CONTRIBUTING OR NONCONTRIBUTING PARTICIPANTS IN A 5 DEFERRED COMPENSATION PLAN AND MAY BE RETIRED OR NONRETIRED. 6

(b) MEMBERS OF THE PUBLIC WHO ARE NOT DEFERRED COMPENSATION PLAN 7 PARTICIPANTS AND WHO HAVE AT LEAST TEN YEARS OF RELEVANT EXPERIENCE IN 8 EITHER FINANCE, INVESTMENT MANAGEMENT, PENSION PLANS OR RETIREMENT PLANS. 9

2. The director of the department of administration or the 10 director's designee. 11

3. The superintendent of financial institutions or the 12 superintendent's designee. 13

4. The director of insurance or the director's designee. 14 5. The director of the Arizona state retirement system or the 15

director's designee. 16 B. GOVERNING COMMITTEE MEMBERS ARE SUBJECT TO THE CONFLICT OF 17

INTEREST PROVISIONS OF TITLE 38, CHAPTER 3, ARTICLE 8. 18 B. C. The governing committee may: 19 1. Investigate and approve tax deferred compensation and annuity 20

programs which PLANS THAT give STATE employees of the state income tax 21 benefits authorized by title 26, United States Code Annotated. 22

2. In carrying out the purposes of this article, enter into 23 agreements with life insurance companies authorized to do business in this 24 state and with bank trustees or custodians and investment counseling firms 25 registered with the securities exchange commission WITH DEMONSTRABLE 26 EXPERTISE IN THE AREAS ENCOMPASSED BY THIS ARTICLE. 27

3. ADOPT RULES. 28 C. D. The governing committee shall: 29 1. Arrange for consolidated billing and efficient administrative 30

services in order SO that any such plans approved shall operate without 31 cost or contribution from the THIS state except for the incidental expense 32 of administering the EXPENSES OF STATUTORILY REQUIRED ADMINISTRATIVE 33 DUTIES AND THE ADMINISTRATION OF payroll salary deduction or reduction and 34 remittance thereof OF THE MONIES to the ADMINISTRATOR, trustee or 35 custodian of the plan or plans. 36

2. Meet monthly QUARTERLY or more frequently as the chairman of the 37 committee deems necessary. 38

3. Arrange for an annual financial audit of the programs and a 39 performance audit of the programs at least once every three years PLANS. 40

4. Adopt rules governing the solicitation of employees by persons 41 offering tax deferred compensation or annuity plans to such employees. 42

4. ARRANGE FOR A PERFORMANCE REVIEW OF THE PLANS OR PARTICIPATION 43 IN BENCHMARKING SURVEYS OR STUDIES AT LEAST EVERY FIVE YEARS. 44

HB 2035

- 4 -

Sec. 4. Section 38-872, Arizona Revised Statutes, is amended to 1 read: 2

38-872. Voluntary participation; authorization 3 A. State employees may participate in tax deferred annuity and 4

deferred compensation programs PLANS established pursuant to the 5 provisions of section 38-871. 6

B. Participants in such THE plans shall authorize their employers 7 in writing to make reductions or deductions in their remuneration as 8 provided in an executed deferred compensation agreement. 9

Agenda Item #4

Portfolio PositioningRecent Equity Market Correction

Performance SummaryRisk Report

IMD Asset Class CommiteesIMD Projects

CIO Report

Arizona State Retirement System

February 23, 2018

Arizona State Retirement System CIO Report 1 / 22




Fiscal Year Performance





Total Fund Positioning

Houseviews:

Neutral on equities

Underweight rates, but overweight credit

Slightly underweight real estate having been a net seller in a priceyenvironment, but poised with dry powder to pursue opportunities in adisciplined fashion





S&P 500 Daily Return History

0

10

20

30

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Num

ber

of D

ays

S&P 500 − Days with Loss Exceeding 2%

●

●

●

●●

●

●

●

●●●

●

●

●

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●

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●

●

●

●

●

●

●

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●

●

●

●

●

●

●●

●

●

●

●

●

●

●

●

●

●

●

●●

●

●

●

●

●

●

●●

●

●●

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●

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●

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●

●●●●●●

●

●

●

●

●

●●

●

●

●

●

●●

●

●

●

●

−10%

−5%

0%

5%

10%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Dai

ly R

etur

n

S&P 500 − Daily Return Distribution by Year





S&P 500 Drawdown History

$1

$2

$3

$4

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Year

Gro

wth

of a

Dol

lar

S&P 500 − Cumulative Return

−20%

−15%

−10%

−5%

0%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Year

Dra

wdo

wn

S&P 500 Drawdowns since the Global Financial Crisis





Return DecompositionPublic MarketsPrivate Markets

Trailing Returns & Dollar Value Add

15.616

7.88.3

8.9

9.7

5.86.4

0%

5%

10%

15%

One Year Three Year Five Year Ten Year

Ann

ualiz

ed R

etur

n

Total Fund SAA Benchmark

Trailing Period Returns as of 12/31/17Total Fund and SAA Benchmark

$0

$1,000

$2,000

$3,000


in M

illio

ns

Allocation Selection Other

Relative to SAA Benchmark as of 12/31/17Total Fund Dollar Value Add






Total Fund Returns

−20%

0%

20%

40%

1980 1990 2000 2010 2020

Ann

ualiz

ed R

etur

n

One Year

Ten Year

Twenty Year

Trailing Period Returns as of 12/31/17

Total Fund Rolling Returns






Allocation E�ect

$−300

$0

$300

$600

$900


in M

illio

ns

Relative to SAA Benchmark as of 12/31/17

Allocation Effect by Asset Class

−4%

−2%

0%

2%

4%


Act

ive

Wei

ght

Relative to SAAP as of 12/31/17

Asset Class Average Active Weights

Public Equity

Public Fixed Income

Commodities

Cash

Multi−Asset Class

Real Estate

Private Debt

Opportunistic Debt

Private Equity

Private Opportunistic Equity

Farmland & Infrastructure






Selection E�ect

$−300

$0

$300

$600


in M

illio

ns

Public Equity

Public Fixed Income

Commodities

Cash

Multi−Asset Class

Real Estate

Private Debt

Opportunistic Debt

Private Equity

Private Opportunistic Equity

Farmland & Infrastructure

Relative to SAA Benchmark as of 12/31/17

Selection Effect by Asset Class






Public Equities Returns & DVA

2423

10.29.7

12.312

6.66.6

0%

5%

10%

15%

20%

25%


Ann

ualiz

ed R

etur

n

Public Equity Composite Benchmark


Public Equity and Composite Benchmark

$−300

$−200

$−100

$0

One Year Three Year Five Year

in M

illio

ns

Allocation Selection Other

Relative to Composite Benchmark as of 12/31/17

Public Equity Dollar Value Add






Allocation E�ect

$−80

$−60

$−40

$−20

$0

$20


in M

illio

ns


Public Equity Allocation Effect by Sub Asset Class

−2%

−1%

0%

1%

2%

3%


Act

ive

Wei

ght (

%)


Public Equity Average Monthly Active Weight

US Large Cap

US Mid Cap

US Small Cap

non−US Developed

Emerging Markets

Risk Factors

Public Opportunistic






Selection E�ect

$−50

$0

$50


in M

illio

ns

US Large

US Mid

US Small

Intl Dev

EM

Risk Factors

Pub Opp


Public Equity Selection Effect

Annualized Returns

as of 12/31/17

Composite One Year Three Year Five Year Ten Year

US Large Cap 20.6% 11.24% 15.61% 8.51%Benchmark 21.83% 11.41% 15.79% 8.5%

Excess -1.23% -0.17% -0.18% 0.02%

US Mid Cap 17.35% 11.05% 15.2% 9.83%Benchmark 16.24% 11.14% 15.01% 9.96%

Excess 1.11% -0.09% 0.2% -0.14%

US Small Cap 13.39% 9.78% 14.24% 9.95%Benchmark 13.24% 12% 15.99% 10.43%

Excess 0.15% -2.22% -1.75% -0.49%

non-US Developed 25.69% 8.78% 8.41% 2.96%Benchmark 25.89% 8.51% 8.62% 3.15%

Excess -0.2% 0.27% -0.21% -0.19%

Emerging Markets 38.92% 8.34% 4.7% NA%Benchmark 37.28% 9.1% 4.42% NA%

Excess 1.64% -0.76% 0.28% NA%

Public Opportunistic -6.32% NA% NA% NA%Benchmark 20.21% NA% NA% NA%

Excess -26.52% NA% NA% NA%






Public Fixed Income Returns & DVA

4.44.3

2.9

3.4

2.12.3

4.1

4.5

0%

1%

2%

3%

4%


Ann

ualiz

ed R

etur

n

Public Fixed Income Composite Benchmark


Public Fixed Income and Composite Benchmark

$0

$100

$200

$300


in M

illio

ns

Effect: Allocation Selection Other

Relative to Composite Benchmark as of 12/31/17Public Fixed Income Dollar Value Add






Allocation E�ect

$0

$50

$100


in M

illio

ns


Fixed Income Allocation Effect by Sub Asset Class

−2%

−1%

0%

1%

2%

3%


Act

ive

Wei

ght


Fixed Income Average Monthly Active Weights

Interest Rate Sensitive High Yield Composite Emerging Market Debt






Selection E�ect

$0

$50

$100

$150

$200


in M

illio

ns

Core High Yield EM Debt

Relative to Composite BenchmarkFixed Income Selection Effect

Annualized Returns

as of 12/31/17

Composite One Year Three Year Five Year Ten Year

Interest Rate Sensitive 3.62% 2.66% 2.43% 4.33%Benchmark 3.54% 2.24% 2.1% 4.01%

Excess 0.08% 0.42% 0.33% 0.33%

High Yield Composite 7.36% 6.24% 5.79% NA%Benchmark 7.5% 6.35% 5.78% NA%

Excess -0.15% -0.11% 0.01% NA%






Internally Managed Portfolios

16.616.7

9.49.5

12.612.7

8.18.2

0%

5%

10%

15%


Ann

ualiz

ed R

etur

n

Internally Managed Composite Composite Benchmark


Internally Managed Portfolios and Composite Benchmark

$0

$50

$100

$150

$200


in M

illio

ns


Internally Managed Portfolios Dollar Value Add






Private Markets Decomposition

Annualized IRRs

as Reported 12/31/17

One Year Three Year Five Year Inception

Total Private Markets 12.33% 10.34% 11.71% 10.19%Benchmark 11.12% 9.51% 10.17% 9.33%

Excess 1.21% 0.83% 1.53% 0.86%

$0

$5,000

$10,000

2008 2010 2012 2014 2016 2018

in M

illio

ns

Private EquityReal Estate

Opportunistic DebtPrivate Debt

Private Opportunistic EquityFarmland and Infrastructure

Private Market Values as of 12/31/17

$−250

$0

$250

$500


in M

illio

ns

Total PrivatesPrivate EquityReal Estate.CurrentOpportunistic DebtPrivate DebtFARMReal Estate.Legacy

Private Markets Dollar Value Add Relative to Composite Benchmarks






Private Markets Composites

Annualized IRRs

as Reported 12/31/17


Private Equity 15.56% 10.71% 12.96% 12.08%PE Benchmark 21.31% 12.36% 13.59% 13.2%

PE Excess -5.75% -1.66% -0.64% -1.11%

Real Estate Current 12.79% 14.34% 15.26% 15.36%RE Current Benchmark 7% 10.05% 10.37% 10.39%

RE Current Excess 5.8% 4.28% 4.89% 4.97%

Real Estate Legacy 1.04% 8.09% 11.26% 5.9%RE Legacy Benchmark 7.07% 11.52% 11.63% 6.08%

RE Legacy Excess -6.03% -3.43% -0.36% -0.18%

Opportunistic Debt 11.93% 5.25% 7.02% 9.66%Opp Debt Benchmark 7.94% 6.6% 6.74% 9.33%

Opp Debt Excess 3.98% -1.35% 0.28% 0.34%

Private Debt 11.16% 10.48% 11.09% 11.14%PD Benchmark 7.86% 7.15% 7.01% 7.06%

PD Excess 3.31% 3.33% 4.08% 4.08%

Farmland & Infrastructure 9.71% 7.01% NA% 6.64%Farmland Benchmark 5.25% 5.51% NA% 5.5%

Farmland Excess 4.46% 1.5% NA% 1.14%





Value at Risk

TOTAL PORTFOLIO VALUE-AT-RISK (VAR)

7

Annualized Total VaR have declined over the last year. As of December 31, 2017, total VaR for ASRS Portfolio was 12.58%, indicating that there is a 5% chance that portfolio could lose ~$4.9B in a given year. Note that a 5% event is expected to occur every 20 years

12.00%

13.00%

14.00%

15.00%

16.00%

17.00%

18.00%

Total Portfolio

SAA





Asset Class Committee Schedule

Date Combined Asset Class Committee Investment Committee

2017

November 30 X

2018

January 18 X

February 2 X





Combined Public and Private Markets Committee Summary

Activities

From November 30, 2017

Approved the increase of $100M to an existing private debt separate account

manager.

From January 18, 2018

Approved adding middle o�ce services with current custodial bank.

From Feburay 5, 2018

Approved a $33M commitment to a real estate co-investment with an existing

account manager.

Approved a $200M commitment to a real estate separate account with a new

manager.





IMD Project Status

Equities Active Management

Multi Asset Strategy Review

Liquidity Strategy

Int l Equities Factor Strategy

Strategic Asset Allocation Review

LTD SAA and Unitization

RRA Unitization

Signals for Tactical Views

Fixed Income Performance Measurement

Total Fund Performance Measurement

Private Debt Reporting Enhancements

Opportunistic Portfolios Reporting Enhancements

Migration to Web Based Reporting and Interactive Graphics

Realtime Performance Estimation

Manager Fee SOP

Israel Boycott Divestment SOP

Export Act SOP

Legal RFP

Custody RFP

IMD Database

Total Fund Attribution

Equities Trading Optimization

Middle Office Review

Middle Office Implementation

SecLit RFP

2017

−07

2018

−01

2018

−07

2019

−01

Date

Status

done

future

in process

ASRS Investment Management Division Projects


Agenda Item #5





MEMORANDUM

TO: Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director DATE: February 16, 2018 RE: Agenda Item #5: Presentation, Discussion, and Appropriate Action Regarding the Allocation and Distribution Method of Retrospective Rate Agreement (RRA) Funds Purpose Presentation, discussion, and appropriate action regarding the RRA and Distribution Methodology Options and Revised Strategic Health Insurance RRA Management and Distribution Policy. Recommendations Approve a Revised Strategic Health Insurance RRA Management and Distribution Policy. Background At the October 27, 2017 Board meeting staff made a presentation on the RRA and Distribution Methodology Options and Strategic Health Insurance RRA Management and Distribution Policy. The Board approved the policy as presented, which directed staff to disburse RRA funds as a cash distribution to eligible members enrolled in eligible plans. As staff began to implement the approved policy, additional research was conducted including an enhanced statutory and tax review. This research revealed several additional considerations concerning a cash distribution of RRA funds. Upon concluding the research with respect to disbursing RRA funds in cash form, it has been determined that it may be more appropriate to provide the distribution in the form of ‘premium reductions’. The previous recommendation approved was designed to:

1. Disburse approximately 25% of the corpus of the RRA Account annually 2. Disburse to health insurance plans that contributed to the RRA Account 3. Be an annual, one time, cash disbursement paid directly to eligible members who are:

a. Enrolled in an eligible plan in December of the Plan year for which a distribution was being made and;

b. Enrolled in an eligible plan in the month which the distribution was being calculated and paid

The revised recommendation is designed to:

1. Allocate a fixed percentage (25% or 331/3% or 50%) of the existing corpus of the RRA account, and 100% of future RRA receipts not to exceed six months of premiums annually, such that, the RRA account is expected to be exhausted in approximately (four or three or two) years

Agenda Item #6 HI & RRA February 16, 2018 Page 2 of 2

2. Reduce health insurance premiums for up to six months beginning in July 2018 and continuing each subsequent year

3. Benefit members who are: a. Enrolled in an eligible plan in December of the plan year for which RRA funds are

being utilized and; b. Enrolled in an eligible plan in each month premiums are reduced

Attachments to this memo include:

A. Revised Strategic Health Insurance Policy: RRA Management and Distribution Policy This policy describes the revised staff recommended method of utilizing RRA Funds as described in the RRA Background, Options, and Distributions Methodology attachment.

B. Pro Forma Estimates of First-Year Distribution The analysis, contained in these three estimates, illustrates the initial payout from the RRA corpus to eligible members targeted for mid-2018 showing utilization over two, three and four year periods.

C. Retrospective Rate Agreement (RRA) Distribution Methodology Options ASRS staff reviewed several options regarding the potential uses of the RRA funds. The attached document, ‘Retrospective Rate Agreement Distribution Methodology Options,’ outlines the options, provides benefits as well as the concerns of each option, and makes a staff recommendation for Board consideration.

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Arizona State Retirement System Strategic Health Insurance Policy: Retrospective Rate Agreement (RRA) Management and Distribution

Background: The ASRS has incorporated a RRA requirement within the retiree medical benefits program contract. The RRA requires that aggregate revenues, including Center for Medicare/Medicaid Services (CMS) payments, health insurance premiums paid by members enrolled in an ASRS eligible medical plan (“members") and any other revenue sources, above a certain expense threshold, be refunded to the ASRS. The ASRS’ purpose for including the RRA requirement was to require that aggregate revenues in excess of the costs of the medical services provided to ASRS retirees, would be refunded to the ASRS if they exceed a certain threshold. The ASRS may then rebate these funds to eligible members. The RRA account balances are recorded in the ASRS’ financial statements, but are specifically excluded from the funded status of any of the ASRS programs because they are separate assets associated to the medical benefit programs. As such, expending funds from the account balance would not have an adverse impact on the funded status calculation or cause an adverse impact on current or projected contribution rates. Management: The RRA Fund will be managed with the expectation the Fund will have a finite life, utilizing the current RRA account balance in approximately four/three/two years and utilizing any new RRA funds in the year following receipt of the additional funds. The RRA requirement is expected to be included in future procurements. Specifically, the RAA Fund will be targeted to be fully distributed over an approximately four/three/two-year period. The distribution rate will be approximately 25%/33 1/3%/50% per year of the beginning corpus plus new RRA funds received during the period, such that the final balance at the end of the fourth/third/second distribution will be approximately zero. The payout rate will be high in order to ensure that the plans who contribute to the RRA fund will be the predominant beneficiaries of the RRA Fund. Payout Methodology:

1. Twenty-Five percent (25%)/Thirty-Three and one third percent (33 1/3%)/Fifty percent (50%) of the corpus, as of December 31, 2017, of the fund will be utilized to reduce premiums each year. In addition, 100% of any new RRA funds generated will be utilized to reduce premiums for the year for which the RRA funds are received, or subsequent year if necessary.

2. The funds will be utilized to reduce monthly premiums over a period of six months of each year, or another number of months to be administratively feasible, only for members who elect to enroll in an ASRS “Eligible Medical Plan”.

3. An ASRS ‘Eligible Medical Plan’ is a plan that provides medical benefits at a level and to a membership generally consistent with a plan that has contributed to the RRA account balance. (There are currently three plans with five different rate structures as follows: Non-Medicare In-State Choice, Non-Medicare Out-of-State Choice Plus, Non-Medicare In-State Navigate, Medicare Advantage HMO, Medicare Senior Supplement.)

4. Each member in each plan who elects to enroll in the Single Option will receive the same distribution amount. Each member in each plan who elected to enroll in the Family Option will receive a distribution proportionate to the ratio of the Family Option premium and Single Option premium.

5. A participant must be enrolled in an Eligible Medical Plan in December of the calendar year prior to the year in which RRA funds are being utilized, and enrolled in an Eligible Medical Plan when premium reductions are applied.

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6. Premium reductions will be in dollar amounts.

7. Premium reductions would be determined annually and would not be perpetual.

8. Calculation Periods will be based upon calendar years (CYs)

9. Distribution Periods will be based upon calendar years (CYs)

10. The Premium reduction months will be determined by ASRS staff based upon the availability of data and logistics.

See attached appendix for a working example. Fund Investment Management The RRA Fund will be managed in a conservative nature due to the intention to utilize the RRA funds to reduce health insurance premiums over a (2 year / 3 year / 4 year) period, and for all new RRA funds to be utilized to reduce health insurance premiums for the subsequent year.

As such, the ordered Investment Goals for the RRA Fund are as follows:

A. Low Volatility of Capital Some volatility of capital may occur, but should be limited.

B. High Liquidity Relatively high liquidity should exist in terms of potential lock-ups, gates, and bid / ask spreads.

C. Returns Interest rate risk in terms of duration and yield curve changes, as well as modest credit risk, can be accepted when warranted.

Fund Management and Accounting The RRA funds may be managed internally or externally, and may be commingled with other assets. The RRA funds will be accounted for as a separate fund. Authorizations Interpretations: The Director will be responsible for interpreting and implementing this Policy. Amendments & Modifications: Amendments and modifications of this policy require Board approval.

Pro Forma Estimate of First-Year Utilization – Two Year Drawdown RRA Refund Amounts by Plan and Year

Calendar Year

RRA Amount Generated Medicare

Advantage HMO

% of RRA

Refund

Dollars applied to Plan Refund

Pool

RRA Amount Generated

Senior Supplement

% of RRA

Refund


Pool


Non-Medicare

% of RRA

Refund


Pool Total RRA

Refund Pool 2011 $12,953,384 50.58% $7,837,218.75 $12,657,048 49.42% $7,657,480.25 -$10,115,733 0.00% $0.00 $15,494,699 2012 $22,787,653 63.15% $16,308,819.04 $13,298,585 36.85% $9,516,705.96 -$10,260,713 0.00% $0.00 $25,825,525 2013 $19,581,656 59.25% $17,685,117.16 $13,465,983 40.75% $12,163,181.84 -$3,199,340 0.00% $0.00 $29,848,299 2014 $17,703,883 56.19% $17,703,908.04 $12,408,956 39.38% $12,407,544.02 $1,394,383 4.43% $1,395,769.93 $31,507,222 2015 $1,869,941 16.30% $1,378,084.32 $9,600,921 83.70% $7,076,420.69 -$3,016,357 0.00% $0.00 $8,454,505 2016 $0.00 n/a $0.00 $0.00 n/a $0.00 $0.00 n/a $0.00 $8,454,505

Interest* 54.81% $870,898.01 43.93% $698,021.34 1.26% $20,021.65 $1,588,940 Total by Plan: $74,898,517 $61,784,045.32 $61,431,493 $49,519,354.10 -$25,197,760 $1,415,791.58 *Through December, 31, 2017

Corpus of RRA: $112,719,190

Calendar Year 2017 Enrollments Medicare Advantage - Single : 15,726 Senior Supplement - Single: 9,168 Choice/Navigate - Single: 4,713 Medicare Advantage - Dual: 3,760

Senior Supplement - Dual: 1,639

Choice/Navigate - Family: 854

Medicare Advantage - Triple: 6

Senior Supplement - Triple: 5

Choice Plus - Single: 91 Choice Plus - Family: 20

Equal payment to all members in each plans, where family coverage payment is proportionate to the ratio of the family premium and single premium (i.e. if family coverage is two times single rate then family payment is single payment times two or if family coverage is single rate times number of individuals covered then payment is single payment times number of individuals covered).

Medicare Advantage Aggregate Calculation Senior Supplement Aggregate Calculation Non-Medicare Aggregate Calculation

Medicare Advantage HMO Corpus * 50% MedAdvSingle Coverage +

(MedAdvFamily Individuals Covered Count)

= Single

Coverage Payment

Senior Supplement Corpus * 50% SrSuppSingle Coverage + (Senior SuppFamily Individuals Covered

Count)

= Single

Coverage Payment

Non-Medicare Corpus * 50% NonMedSingle Coverage +

(NonMedFamily Coverage * Ratio of NonMedFamily

Premium/NonMedSingle Premium)

= Single

Coverage Payment

$61,784,045.32 * 50% 15,726 + (3,760 * 2 + 6 * 3) = $1,327.89

$49,519,354.10 * 50% 9,168 + (1,639* 2 + 5 * 3) = $1,986.67

$1,415,791.58 * 50% 4,713 + 91 + (854 * 2/1) + (20 * 2/1) = $108.04

Pro Forma Estimate of First-Year Utilization – Two Year Drawdown Medicare Advantage Monthly Premium Reduction

Calculation Senior Supplement Monthly Premium

Reduction Calculation Non-Medicare Monthly Premium Calculation

Medicare Advantage Aggregate Calculation

Length of Premium Reduction (in months)

=

Single Monthly Premium Reduction

Senior Supplement Aggregate Calculation


=


Non-Medicare Aggregate Calculation


=


$1,327.89 6 = $221.32

$1,986.67 6 = $331.16

$108.04 6 = $18.01

Medicare Advantage Monthly Premium Senior Supplement Monthly Premium Non-Medicare Monthly Premium

Single Coverage = $222.00 Single Coverage = $351.00 Single Coverage = $753.00 - $1,339.00

Medicare Advantage Monthly Member Cost Senior Supplement Monthly Member Cost Non-Medicare Monthly Member Cost

Single Coverage Premium – Single Monthly Premium Reduction = $0.68

Single Coverage Premium – Single Monthly Premium

Reduction = $19.84

Single Coverage Premium – Single

Monthly Premium Reduction

= $734.99 - $1,320.99

Calendar Year 2017 Annual Reduction Amounts (to reduce premiums in Calendar Year 2018):

Medicare Advantage - Single = $1,327.89 Senior Supplement - Single = $1,986.67 Choice/Navigate - Single = $108.04 Medicare Advantage - Dual = $2,655.78 Senior Supplement - Dual = $3,973.94 Choice/Navigate - Family = $216.08 Medicare Advantage - Triple = $3,983.67 Senior Supplement - Triple = $5,960.91 Choice Plus - Single = $108.04

Choice Plus - Family = $216.08

Total Distribution: $56,362,029.13

Calendar Year 2017 Monthly Reduction Amounts (to reduce premiums in Calendar Year 2018):

Medicare Advantage - Single = $221.32 Senior Supplement - Single = $331.16 Choice/Navigate - Single = $18.01 Medicare Advantage - Dual = $442.64 Senior Supplement - Dual = $662.62 Choice/Navigate - Family = $36.02 Medicare Advantage - Triple = $663.96 Senior Supplement - Triple = $993.48 Choice Plus - Single = $18.01



Pro Forma Estimate of First-Year Utilization – Three Year Drawdown RRA Refund Amounts by Plan and Year

Calendar Year


Advantage HMO

% of RRA

Refund


Pool


Senior Supplement

% of RRA

Refund


Pool


Non-Medicare

% of RRA

Refund


Pool Total RRA












Medicare Adv HMO Corpus * 33 1/3% MedAdvSingle Coverage +


= Single

Coverage Payment

Sr Supplement Corpus * 33 1/3% SrSuppSingle Coverage + (Senior SuppFamily Individuals Covered

Count)

= Single

Coverage Payment

Non-Med Corpus * 33 1/3% NonMedSingle Coverage +



= Single

Coverage Payment

$61,784,045.32 * 33 1/3% 15,726 + (3,760 * 2 + 6 * 3) = $885.26

$49,519,354.10 * 33 1/3% 9,168 + (1,639* 2 + 5 * 3) = $1,324.64

$1,415,791.58 * 33 1/3% 4,713 + 91 + (854 * 2/1) + (20 * 2/1) = $72.03

Pro Forma Estimate of First-Year Utilization – Three Year Drawdown Medicare Advantage Monthly Premium Reduction





=




=




=


$885.26 6 = $147.54

$1,324.64 6 = $220.78

$72.03 6 = $12.00






Reduction = $130.22



= $741.00 - $1,327.00


Medicare Advantage - Single = $885.26 Senior Supplement - Single = $1,324.64 Choice/Navigate - Single = $72.03 Medicare Advantage - Dual = $1,770.52 Senior Supplement - Dual = $2,649.28 Choice/Navigate - Family = $144.06 Medicare Advantage - Triple = $2,655.78 Senior Supplement - Triple = $3,973.92 Choice Plus - Single = $72.03







Pro Forma Estimate of First-Year Utilization – Four Year Drawdown RRA Refund Amounts by Plan and Year

Calendar Year


Advantage HMO

% of RRA

Refund


Pool


Senior Supplement

% of RRA

Refund


Pool


Non-Medicare

% of RRA

Refund


Pool Total RRA












Medicare Adv HMO Corpus * 25% MedAdvSingle Coverage +


= Single

Coverage Payment

Senior Supplement Corpus * 25% SrSuppSingle Coverage + (Senior SuppFamily Individuals Covered

Count)

= Single

Coverage Payment

Non-Medicare Corpus * 25% NonMedSingle Coverage +



= Single

Coverage Payment

$61,784,045.32 * 25% 15,726 + (3,760 * 2 + 6 * 3) = $663.95

$49,519,354.10 * 25% 9,168 + (1,639* 2 + 5 * 3) = $993.49

$1,415,791.58 * 25% 4,713 + 91 + (854 * 2/1) + (20 * 2/1) = $54.02

Pro Forma Estimate of First-Year Utilization – Four Year Drawdown Medicare Advantage Monthly Premium Reduction





=




=




=


$663.95 6 = $110.66

$993.49 6 = $165.58

$54.02 6 = $9.00






Reduction = $185.42



= $746.00 - $1,330.00


Medicare Advantage - Single = $663.95 Senior Supplement - Single = $993.49 Choice/Navigate - Single = $54.02 Medicare Advantage - Dual = $1,327.90 Senior Supplement - Dual = $1,986.98 Choice/Navigate - Family = $108.04 Medicare Advantage - Triple = $1,991.85 Senior Supplement - Triple = $2,980.47 Choice Plus - Single = $54.02







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Retrospective Rate Agreement (RRA) – Background, Options and Distribution Methodology

Background: The ASRS has incorporated an annual one-way RRA requirement within the retiree health benefits program contract since 2011, currently with United Health Care (UHC) (program vendor). The RRA requires that aggregate revenues, including Center for Medicare/Medicaid Services (CMS) payments, health insurance premiums paid by members enrolled in an ASRS eligible health plan (members) and any other revenue sources, above a certain expense threshold, be refunded to the ASRS. The contractual requirement uses a ratio referred to as the Medical Loss Ratio (MLR), which is currently set at a 93% threshold. The ASRS’ purpose for including the RRA requirement was to require that aggregate revenues in excess of the costs of the health services provided to ASRS retirees, would be refunded to the ASRS if they exceed a certain threshold. In other words, if the aggregate revenues received by the retiree health benefits provider exceed the aggregate costs of the services provided to members, plus an amount for expenses, overhead, and profit, then the excess would be refunded to the ASRS for the benefit of retirees rather than be retained by the retiree health benefits provider and thereby added to corporate profits. The current and past RRAs have provided a maximum level of retention by UHC of 7% of total plan revenues. From this retention, UHC pays all administrative, legal, and marketing expenses, staff salaries, and other company expenses. Remaining revenues from the 7% are deemed to be profit for UHC. As a result, 93% of plan revenues are to be used for plan expenses associated with medical, hospital, prescription medications, and ancillary services and treatments. If these plan expenses do not result in the 93% MLR (plan expenses/total revenues), then the ASRS receives a reimbursement of unused revenue up to the 93% level. If plan expenses exceed the 93% loss ratio however, then UHC’s 7% is decreased until all plan expenses are paid, reflecting the one-way nature of the RRA. Status: Since the 2011 plan year, the ASRS has received annual reimbursements. As of December 31, 2017 the RRA account balance is approximately $112,719,190. The RRA account balances are recorded in the ASRS’ financial statements, but are specifically excluded from the funded status of any of the ASRS programs because they are separate assets associated with the health benefit programs. As such, expending funds from the account balance would not have an adverse impact on the funded status calculation or cause an adverse impact on current or projected contribution rates.

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RRA Funds Generated by Plan

Calendar Year Medicare Advantage HMO

Medicare Senior Supplement

Non-Medicare In-State Choice and Out-of-State Choice Plus Total RRA Refund

2011 $12,953,384 $12,657,048 -$10,115,733 $15,494,689 2012 $22,787,653 $13,298,585 -$10,260,713 $25,825,525 2013 $19,581,656 $13,465,983 -$3,199,340 $29,848,299 2014 $17,703,883 $12,408,956 $1,394,383 $31,507,222 2015 $1,869,941 $9,600,921 -$3,016,357 $8,454,505 2016 $0.00 $0.00 $0.00 $0.00 Interest* $1,588,940 Totals: $74,898,517 $61,431,493 -$25,197,760 $112,719,190

* Through December 31, 2017 Options Considered: In general, the following options exist with respect to how the RRA balances could be utilized. Each option is followed by a brief description and benefit of the option, and includes the key concerns.

1. Add Additional Health Insurance Benefits Description & Benefit: Adding additional coverage benefits would reduce the costs experienced by retirees when obtaining certain health services that are currently not covered.

Concerns: Adding additional coverage benefits would result in additional long-term costs that could not be defrayed when or if the RRA account balance is reduced or eliminated.

2. Reduce Health Insurance Co-payments

Description & Benefit: Reducing health insurance co-payments would reduce out-of-pocket expenses for retirees, especially those who are high frequency users of services.

Concerns: Adding additional coverage benefits would result in additional long-term costs that could not be defrayed when or if the RRA account balance is reduced or eliminated.

3. Enhance Wellness Initiatives

Description & Benefit: Adding additional wellness initiatives may reduce the aggregate future costs of coverage by inducing healthier lifestyles among members.

Concerns: ASRS and UHC have already incorporated wellness initiatives (such as SilverSneakers, the 24-hour Nurseline, the Caregivers Program, the Health Risk Assessment tool, and several targeted reminders about eye screenings, wellness visits, and controlling cholesterol) and the marginal benefit of further enhancements is unclear.

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4. Establish a Self-Funded Program (Self-Insurance) Description & Benefit: A self-funded program would most likely require the procurement/leasing of one or more health provider networks from large medical insurance providers. In addition, a precise cash flow funding equilibrium between aggregate revenues and aggregate costs would need to be developed.

A well implemented self-funding program could result in enhanced provider network flexibility and lower premiums. Concerns: Self-funding would transfer the risk (of aggregate revenues being below aggregate costs) from the external vendor to the ASRS.

Self-funding would require more internal staff management and staff (Full-Time Employee) resources.

Self-funding would require significant internal (or externally purchased) actuarial underwriting and analysis that is currently provided by the program vendor.

5. Upgrade Information Technology Systems

Description & Benefit: Upgrades to information technology systems could include developing analytical tools, online web applications, segmented survey capabilities, expanding data element gathering, and targeted communications capabilities.

Concerns: Upgrades to the systems used to administer health insurance are already being prioritized as part of the ‘Oracle Modernization’ effort within the current technology development plan. The benefits of further upgrades to information technology systems are not clear and may not outweigh the costs.

The ASRS already has a clear budgetary approval process that it follows for technology upgrades. Funding for technology upgrades should continue to follow the current process.

6. Reduce Health Insurance Premiums for all Plans

Description & Benefit: All monthly health insurance premiums could be reduced by various amounts and over various future periods until the RRA account balance is eliminated, therefor benefiting all groups of members. The premium reduction will be spread out monthly throughout each year. Reductions would apply only to members enrolled in a plan in December in the calendar year for which the RRA funds are being utilized and be enrolled in an eligible plan during each month, of the six month period, for which RRA funds are being utilized.

Concerns: Member groups that did not contribute to the funding of the RRA account balance would benefit at the expense of those groups that did contribute.

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Members could migrate from plans contributing to the RRA account balance to plans no contributing to the RRA account balance to arbitrage premiums. This possibility and expected benefit would likely be de minimis.

Members who may change from among the various programs for non-arbitrage (standard health-care and age 65 CMS coverage) reasons may randomly, or based upon aging, receive or not-receive the premium reductions. This possibility and expected costs/benefit would likely be de minimis.

7. Refund Health Insurance Premiums for all Plans Description & Benefit: A portion of all eligible enrolled member’s annual medical plan premiums would be returned to members until the RRA account balance is eliminated, thereby benefiting all groups of members. The refund benefit will occur once a year. Refunds would apply only to members enrolled in a plan in December in the calendar year for which RRA funds are being utilized and enrolled in an eligible plan during the month which refunds are being paid. Concerns: Member groups that did not contribute to the funding of the RRA account balance would benefit at the expense of those groups that did contribute. Members could migrate from plans contributing to the RRA account balance to plans not contributing to the RRA account balance to arbitrage premiums. This possibility and expected benefit would likely be de minimis.


8. Reduce Health Insurance Premiums Only for Plans that Contributed to the RRA Account Balance

Description & Benefit: Only those health insurance plans that contributed to the RRA account balance (“contributing plans”) would benefit from the RRA account balance. Monthly health insurance premiums for contributing plans could be reduced by various amounts and over various future periods until the RRA account balance is eliminated therefore benefiting only those plans that contributed to the RRA account balance. Reductions would apply only to members enrolled in an eligible plan that contributed funds to the RRA account balance in the December of the calendar year for which the distribution is being made, and distribution amounts would be determined by the calendar year enrollment and the member would need to be enrolled in an eligible plan during each month, of the six month period, for which RRA funds are being utilized.

Concerns:

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Members could migrate from plans not contributing to the RRA account balance to plans contributing to the RRA account balance to arbitrage premiums. This possibility and expected benefit would likely be de minimis.


9. Refund Health Insurance Premiums Only for Plans that Contributed to the RRA Account Balance

Description & Benefit: Only those health insurance plans that contributed to the RRA account balance (“contributing plans”) would benefit from the RRA account balance. A portion of eligible member’s annual medical plan premiums would be returned to members until the RRA account balance is eliminated. The refund benefit will occur one a year. Refunds would apply only to members enrolled in a contributing plan in December for which RRA funds are being utilized and enrolled in an eligible plan during the month which refunds are being paid therefore only benefiting members enrolled in plans that contributed to the RRA fund.

Concerns: Members could migrate from plans not contributing to the RRA account balance to plans contributing to the RRA account balance to arbitrage premiums. This possibility and expected benefit would likely be de minimis.


10. Reduce Health Insurance Premiums Only for Members that Contributed to the RRA Account Balance

Description & Benefit: Only those members that were enrolled in a health insurance plan that contributed to the RRA account balance (“contributing members”) would benefit from the RRA account balance. Monthly health insurance premiums for contributing plans could be reduced by various amounts and over various future periods until the RRA account balance is eliminated, therefore benefiting only those members that contributed to the RRA account balance.

Reductions would apply only to contributing members enrolled in an eligible plan that contributed funds to the RRA account balance in the December of the calendar year for which the distribution is being made, and distribution amounts would be determined by the calendar year enrollment and the member would need to be enrolled in an eligible plan during each month, of the six month period, for which RRA funds are being utilized.

Concerns:

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Extremely complex, contributing member identification would be difficult, contributing members may have participated in multiple plans, would result in excess funds in the cases where contributing members have deceased or moved to different plans. Not likely feasible.

11. Refund Health Insurance Premiums Only for Members that Contributed to the RRA Account Balance

Description & Benefit: Only those members that were enrolled in a health insurance plan that contributed to the RRA account balance (“contributing members”) would benefit from the RRA account balance. A portion of eligible member’s annual medical plan premiums would be returned to members until the RRA account balance is eliminated. The refund benefit will occur one a year. Refunds would apply only to contributing members enrolled in an eligible plan that contributed funds to the RRA account balance in the December of the calendar year for which the distribution is being made, and distribution amounts would be determined by the calendar year enrollment and the member would need to be enrolled in an eligible plan during each month for which RRA funds are being utilized therefore only benefiting members who contributed to the RRA account balance.

Concerns: Extremely complex, contributing member identification would be difficult, contributing members may have participated in multiple plans, would result in excess funds in the cases where contributing members have deceased or moved to different plans. Not likely feasible.

Recommendation: Option #8: Reduce Health Insurance Premiums Only for Plans that Contributed to the RRA Account Balance

The following factors were utilized in determining the initial option for consideration:

• Benefit Focus: o Ensuring that incremental benefits are clearly directed to members.

• Cost/Benefit Equity o Ensuring that plans, and to the extent possible members, which fund the RRA account

balance also receive the benefit of the account balance, where reasonably feasible, given that all members enrolled in an eligible plan shared the pricing risk by participating in the plan that generated the RRA funds.

• Cost Sustainability: o Ensuring that possible benefit enhancements do not further increase program costs.

• Long Term Premium Level Consistency o Ensuring the ability to continue with the recommendation without significant premium

jumps or benefit changes irrespective of the existence of future RRA account balances. • Adverse Impact

o Ensuring that mitigation of the differences between actual plan cost and premiums paid by members does not significantly increase utilization of the more costly plans, given that the absolute and relative premium levels may affect the selection of plans by members.

• Legal and Tax Considerations

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o Mitigating possible interpretation risks • Health Benefit Supplement

o Minimizing impact to health benefit supplement distributions

Concepts & Parameters: The RRA Fund will be managed with the expectation the Fund will have a finite life, utilizing the full current RRA account balance in approximately four/three/two years and utilizing any new RRA funds in the year following receipt of the additional funds. The RRA requirement is expected to be included in future procurements. Specifically, the RRA Fund will be targeted to be fully distributed over an approximately four/three/two-year period. The distribution rate will be approximately 25%/33 1/3%/50% per year of the beginning corpus plus any new RRA funds received during the period, such that the final balance at the end of the fourth/third/second distribution will be approximately zero. The payout rate will be higher in order to ensure that the plans who contribute to the RRA fund will be the predominant beneficiaries of the RRA Fund. Payout Methodology:

1. Twenty-Five percent (25%)/Thirty-Three and one third percent (33 1/3%)/Fifty percent (50%) of the corpus, as of December 31, 2017, of the fund will be utilized to reduce premiums each year. In addition, 100% of any new RRA funds generated will be utilized to reduce premiums for year for which the RRA funds are received, or subsequent year if necessary.

2. The funds will be utilized to reduce monthly premiums over a period of six months of each year, or another number of months to be administratively feasible, only form members who elect to enroll in an ASRS “Eligible Medical Plan”.

3. An ASRS ‘Eligible Medical Plan’ is a plan that provides medical benefits at a level and to a membership generally consistent with a plan that has contributed to the RRA account balance. (There are currently three plans with five different rate structures as follows: Non-Medicare In-State Choice, Non-Medicare Out-of-State Choice Plus, Non-Medicare In-State Navigate, Medicare Advantage HMO, Medicare Senior Supplement.)

4. Each member in each plan who elects to enroll in the Single Option will receive the same distribution amount. Each member in each plan who elected to enroll in the Family Option will receive a distribution proportionate to the ratio of the Family Option premium and Single Option premium.

5. A participant must be enrolled in an Eligible Medical Plan in December of the calendar year prior to the year in which RRA funds are being utilized, and enrolled in an Eligible Medical Plan when premium reductions are applied.

6. Premium reductions will be in dollar amounts. 7. Premium reductions would be determined annually and would not be perpetual. 8. Calculation Periods will be based upon calendar years (CYs) 9. Distribution Periods will be based upon calendar years (CYs) 10. The Premium reduction months will be determined by ASRS staff based upon the availability of

data and logistics. See attached appendix for a working example.

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Fund Investment Management The RRA Fund will be managed in a conservative nature due to the intention to utilize the RRA funds to reduce health insurance premiums over a (2 year / 3 year / 4 year) period, and for all new RRA funds to be utilized to reduce health insurance premiums for the subsequent year. As such, the ordered Investment Goals for the RRA Fund are as follows:

A. Low Volatility of Capital Some volatility of capital may occur, but should be limited.

B. High Liquidity Relatively high liquidity should exist in terms of potential lock-ups, gates, and bid / ask spreads.

C. Returns Interest rate risk in terms of duration and yield curve changes, as well as modest credit risk, can be accepted when warranted.

Fund Management and Accounting The RRA funds may be managed internally or externally, and may be commingled with other assets. The RRA funds will be accounted for as a separate fund. Authorizations Interpretations: The Director will be responsible for interpreting and implementing the “Strategic Health Insurance Policy: Retrospective Rate Agreement (RRA) Management and Distribution” Policy. Amendments & Modifications: Amendments and modifications of this policy require Board approval.

Agenda Item #6



ARIZONA STATE RETIREMENT SYSTEM Paul Matson

Director

TO: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director Mr. Anthony Guarino, Deputy Director and Chief Operations Officer DATE: February 2, 2018 RE: Agenda Item #6: Presentation, Discussion and Appropriate Action Regarding Selection of a New

Chief Internal Auditor and the Future Direction of the Internal Audit Division (IAD) Purpose: Discuss the prospective duties and responsibilities of the IAD, and the procedure to select a new Chief Internal Auditor. Recommendations:

1. Implement ‘Option #3: Change Duties and Structure’ of the attached “Internal Audit Model Options” paper, which would result in the IAD expanding the depth of operational audits, engaging in internal consultative services, advising on enterprise risk management, incorporating lean auditing processes, and continuing investment audits, fraud hotline management, GASB testing, and ad-hoc audits at the direction of the Operations, Audit and Legislative Committee (OALC), or the Director.

2. Migrate the remaining responsibilities of ensuring employer compliance to the Member Services Division (MSD), and utilize a risk-based process to determine employer compliance reviews.

3. Recommend selection of new Chief Internal Auditor be delegated to the Director, with participation and oversight by the Chair of the OALC.

Background: The retirement of the previous Chief Internal Auditor prompted the agency to review how best to maximize the value the ASRS receives from the IAD. The recommendations above are a result of that review. To assist in the evaluation process, the agency first prepared a white paper (included in the material and titled "Internal Audit Research Findings – Executive Summary") detailing the agency’s audit authority, national standards, and trends in the internal audit field. The white paper identified changes that should make Internal Audit outputs more valuable including incorporating Lean Audit processes, risk-based audit selections and expanding Internal Audit’s role to include consulting and Enterprise Risk Management advisement. Next, the agency evaluated possible models of how the future IAD could best be comprised. The agency staff determined that a possibly more beneficial model places the employer compliance function in the division that contains the Employer Relations team, the MSD. The new IAD would focus on risk-based operational audits, consulting, and Enterprise Risk Management advisement among other duties. Finally, an MSD analysis determined that with additional training the employer compliance functions can be absorbed without requiring additional staff. Areas of employer operations requiring a compliance review will be selected based on identified risk, data mining, and analysis rather than random selection. Analysts and the Employer Relations team will work together with employers to address issues identified and improve compliance going forward. Internal Audit would review MSD processes and findings, and report significant deviations to the OALC. Attachments: Internal Audit Model Options

Current and Proposed Employer Compliance Review Models Internal Audit Research Findings

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Internal Audit Model Options

INTRODUCTION: The current source of the ASRS’ audit authority is the Board. To provide the most value to the agency, Internal Audit (IA) activities should consider a risk-based approach. In addition, IA should be compliant with Institute of Internal Auditor Standards and the standards specific to any required certifications and provide meaningful recommendations and expertise to enhance agency performance and compliance.

Any redesign of the IA model should consider accomplishing three goals while retaining a prudent level of independence: Effort (resource allocation) and expected outcomes based upon enterprise-wide, risk

analysis Resource optimization (including productivity with big data and algorithm-based

analysis) Collaboration with non-IA employees and external entities including employers to

enhance successful outcomes

OPTION #1: MAINTAIN STATUS QUO 1. Chief Internal Auditor (CIA) reports functionally to the Board, and administratively to the

Director 2. Two to three internal auditors report to the CIA:

a. Current audit staff have professional certifications including Certified Public Accountant (CPA)

b. Current staff is allocated between internal (including IT audit) and employer audit functions

3. Key audit area include: a. Employer audits (comprehensive examination)

i. Criteria for employers to be audited may be random, based on risk or on tips received

ii. Auditors review payroll and other records to identify areas of non-compliance

iii. The focus is on monetary consequences rather than controls b. Quality reviews of internal benefit calculations:

i. The focus is on calculation accuracy rather than controls ii. Calculations for review are typically consistent with little variation

iii. Reviews consist of replications of the calculation using the same tools the business uses for the original calculation

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c. Investment management/administrative fees: i. Previously handled by the CIA

ii. Reviews focus on reconciliation against internal amounts. d. Audits of internal programs based upon Audit Plan or Director requests:

i. All findings are reported for management response ii. Audit reports may be presented without factoring in risk ranking of

findings and cost/benefit of any recommended remediation measures e. Fraud hotline management / Fraud investigations:

i. Currently a telephone tip line to the CIA ii. As appropriate, tips are researched by IA staff or forwarded to specialized

Arizona State Retirement System (ASRS) staff for investigation f. Other audit areas:

i. GASB 68 census testing ii. Audit of foreign annuitants

4. Results of all audit work reported to the Operations, Audit and Legislative Committee (OALC) in a report-style format

5. No changes to the Governance Handbook or IA charter 6. Complete independence of the operation; does not participate in risk evaluation or

provide perspective or advice to staff or management based on IA experience and observations

OPTION #2: CHANGE/EXPAND DUTIES BUT MAINTAIN CURRENT STRUCTURE 1. CIA reports functionally to the Board, and administratively to Director 2. Two to three internal auditors report to the CIA 3. Remaining duties include:

a. Employer audits using either the current methodology or changing to a risk-based selection

b. Investment audit function c. Fraud hotline management d. GASB testing

4. Duties change/expand to include all or some subset of: a. Change quality assurance reviews to become operational audits that are

systematic reviews of effectiveness, efficiency and economy of the operation and its controls. For example, rather than replicating a disbursement calculation focus on the adequacy of controls and if those controls are being used.

b. Consulting role: i. Review newly modified processes before implementation in order to

recommend security, efficiency, or other enhancements early so that their integration / implementation can be considered

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ii. Review software before purchase / implementation in order to recommend security, efficiency, or other enhancements early so that their integration / implementation can be considered

iii. Identify root cause(s) of issues and recommend meaningful action plans that help management fix problems and address any resulting difficulties

iv. Ensure efficient Lean processes are mapped prior to projects originating (IT and non-IT projects)

v. Ensure timelines are adhered to, or deviations are understood by management for IT projects

vi. Operate in an advisory role for external audits for areas where IAD has already investigated

vii. Operate in an advisory role for internal staff when changes to policies are considered

c. Risk (Enterprise Risk Management) advisors: i. Utilize the upcoming risk management software to create a dynamic

audit plan based on actual risks; provide assurance that ASRS is focusing on correct risks; and suggest new areas of risk based on IA expertise

ii. Provide independent assurance to the Board that ASRS risk management activities are adequate, present and functioning (3rd line of defense)

iii. Expand audit activities into non-traditional areas where risk is present including agency strategy selection and assumptions, accuracy/reliability of information in analyst reports to management and the Board, hiring practices, and cultural practices like how decisions are made

iv. Provide guidance on COSO Enterprise Risk Management and Internal Control frameworks; training options include framework guidebooks, self-paced courses, Institute of Internal Auditor (IIA) courses on COSO/risk auditing, and COSO Internal Control Certificate Program

d. Incorporating Lean reviews into internal audit processes: i. Use data analytics to identify audit priorities

ii. Meet with stakeholders to align audit with strategic objectives iii. Identify control weaknesses and opportunities to streamline processes iv. Reduce audit reports to include essential information that drives action v. Assess if follow-up action is warranted on low-moderate risk issues

vi. Provide guidance on Lean Six Sigma (LSS) auditing; training options include self-paced courses, IIA courses on LSS Tools for Internal Audit Planning, and certifications in LSS

e. Conduct ad-hoc audits where risks appear high at the direction of the CIA, Director, or OALC.

5. Reports to OALC are either assurances that proper controls are in place and functioning or that control deficiencies exist, what root cause(s) may be, and recommendations on

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how to correct. For example, IA reviews the employer audit program to ensure that it has the controls in place to address the risk areas identified rather than just assessing an employer’s compliance.

6. Limited or no changes to the Governance Handbook or IA charter. 7. Retains independent perspective while also participating and lending expertise to

operation.

OPTION #3: CHANGE DUTIES AND STRUCTURE 1. CIA reports functionally to the Board, and administratively to Director 2. Augmented audit duties split between divisions:

a. Employer audit function moves to Member Services Division (MSD) and changes to compliance reviews:

i. No additional staff needed in MSD to take over new functions: 1. With additional training, existing MSD Analyst and Member

Advocate will perform data analytics to identify anomalies and use risk-based data to perform targeted compliance reviews

a. Ideal knowledge, skills, abilities (KSAs) may include: i. Quality auditing experience including ISO 9001 or

related certification or related certification/training

ii. Advanced ability to data mine using tools like Excel and SQL and provide educated feedback

iii. Knowledge of process improvement techniques like LSS certifications or related certification/training

2. Employer Relations (ER) then works with the Employer to establish remediation activities based on compliance reviews and follows up as necessary to ensure changes are implemented

3. IA will conduct testing for efficacy and performance of the realigned process and report to OALC (until acceptable risk profile is established). Thereafter, IA will perform periodic reviews on a risk basis.

b. Two auditors remain reporting to the CIA: i. Remaining duties include:

1. Investment audit function 2. Fraud hotline management 3. GASB testing

ii. Duties change/expand to include all or some subset of:

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1. Change quality assurance reviews to become operational audits that are systematic reviews of effectiveness, efficiency and economy of the operation and its controls. This will include operational audits of the new, MSD employer compliance review function. For example rather than replicating a disbursement calculation focus on the adequacy of controls and if those controls are being used.

2. Consulting role: a. Review newly modified processes before implementation

in order to recommend security, efficiency, or other enhancements early so that their integration / implementation can be considered

b. Review software before purchase / implementation in order to recommend security, efficiency, or other enhancements early so that their integration / implementation can be considered

c. Identify root cause(s) of issues and recommend meaningful action plans that help management fix problems and address any resulting difficulties

d. Ensure efficient Lean processes are mapped prior to projects originating (IT and non-IT projects)

e. Ensure timelines are adhered to, or deviations are understood, by management for IT projects

f. Operate in an advisory role for external audits for areas where IAD has already investigated

g. Operate in an advisory role for internal staff when changes to policies are considered

3. Risk (Enterprise Risk Management) advisors: a. Utilize the upcoming risk management software to create

a dynamic audit plan based on actual risks; provide assurance that ASRS is focusing on correct risks; and suggest new areas of risk based on IA expertise

b. Provide independent assurance to the Board that the ASRS risk management activities are adequate, present and functioning (3rd line of defense)

c. Expand audit activities into non-traditional areas where risk is present including agency strategy selection and assumptions, accuracy/reliability of information in analyst reports to management and the Board, hiring practices, and cultural practices like how decisions are made

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d. Provide guidance on COSO Enterprise Risk Management and Internal Control frameworks; training options include framework guidebooks, self-paced courses, Institute of Internal Auditor (IIA) courses on COSO/risk auditing, and COSO Internal Control Certificate Program

4. Incorporating Lean reviews into Internal Audit processes: a. Use data analytics to identify audit priorities b. Meet with stakeholders to align audit with strategic

objectives c. Identify control weaknesses and opportunities to

streamline processes d. Reduce audit reports to include essential information that

drives action e. Assess if follow-up action is warranted on low-moderate

risk issues f. Provide guidance on LSS auditing; training options include

self-paced courses, IIA courses on LSS Tools for Internal Audit Planning, and certifications in LSS

5. Conduct ad-hoc audits where risks appear high at the direction of the CIA, Director, or OALC

3. Reports to OALC are either assurances that proper controls are in place and functioning or that control deficiencies exist, what root cause(s) may be, and recommendations on how to correct

4. Changes to the IA charter will be required to remove reference to employer investigations

OPTION #4: POSSIBLE ALTERNATIVE MODELS 1. CIA reporting structure:

2. Number of auditors reporting to CIA:

3. Duties of IA:

4. What will be reported to OALC:

5. Any changes to IA charter or Governance Handbook:

Current Employer Compliance Review Model

Proposed Employer Compliance Review Model Member Services Division (MSD) Absorbs Employer Compliance Reviews

Employer Compliance

Reviews

New/current employer

reviewed on scheduled basis

Risk-based selection of

Employer for compliance

review

Employer notified, data

requested, scrubbed and

analyzed

Findings presented to

Employer Relations

Manager and MSD AD

Findings presented to Employer and

ASRS management

Address Employer

response and facilitate closing

conference

Create Employer training then

follow-up with Employer to

ensure compliance

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Internal Audit Research Findings – Executive Summary Audit Authority: The source of the Arizona State Retirement System (ASRS)’ audit requirement is the ASRS Board; this is consistent with many other systems surveyed

• Recommendation: The agency should consider legislation to ensure employers are required to allow auditors on premises

Structure and Standards: In most ways the ASRS’ Internal Audit Division (IAD) appears consistent with other systems:

• Reporting administratively to the Director and functionally to the Board • ASRS IAD Full Time Employees (FTE) levels are within the ranges reported by many other

systems (<10 FTEs) • IAD staff indicated compliance with nationally and internationally recognized standards

including the Institute of Internal Auditor Standards, technology standards like National Institute of Standards and Technology (NIST) and COBIT, and standards specific to their specific certifications

• Exceptions: o Many AZ agencies do not have IADs o Depending on the certifications desired, the marketplace may support a Chief

Internal Auditor salary higher than the current ASRS salary range Audit Plan: The FY2018 ASRS IAD Audit Plan dedicates hours to disbursement quality reviews, employer audits and audits of investment vendor management/administrative fees. A recent National Association of State Retirement Administrators (NASRA) survey indicates only 18 of 36 respondents: (50%) have their IAD conduct disbursement quality testing, 36% have their IAD conduct employer compliance testing, and only 19% have their IAD conduct investment policy compliance and manager fee testing. Industry Focus: Industry articles, papers, conferences and surveys indicate IADs are looking for ways to make their divisions more value-added to their organizations. Topics under discussion in the IA field include:

• Incorporating Lean processes to identify control weaknesses and streamline processes • CalPRS reports a collaboration between Audit and their Employer Relations teams whereby

Audit forwards results to Employer Relations, who then creates and oversees a resolution plan for employers

• Use of data analytics to review large volumes of data and improve audit focus • Use of root cause analysis and offering meaningful action plans that help management fix

problems and address any resulting difficulties • Deriving more value from major Information Technology (IT) projects by engaging IT audit

earlier rather than downstream in the projects and focusing audit on emerging technology risks

• Expanding audit’s involvement as a line of defense against risk by using IA’s global perspective to ensure management focuses on the right risks and implements the most effective controls, and expanding audits into risks in areas like strategy development, corporate culture or communications not traditionally reviewed (eg. operation reports, analyst reports, etc. used to communicate information to stakeholders and the Board)

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1.1 INTRODUCTION:

In November 2017, a Human Resources Analyst and a Strategic Planning Analyst, were tasked with researching the agency’s audit authority and requirements, current activities of the IAD) of the ASRS, national standards in Internal Auditing (IA), and trends in IA including peer research and salary trends. Below are the findings of that research. 1.2 AUDIT AUTHORITY: Statutory Guidance:

At present, there is not an Arizona statute that specifically grants the ASRS auditing powers. • The Assistant Attorney General confirmed this finding

ASRS Board Governance Handbook:

The ASRS Governance Handbook addresses the duties and responsibilities of the IAD in multiple sections:

Pg. 3: Board Duties and Responsibilities #19 Biennially approval IA plan #20 Review and approve recommendations of Director to appoint or remove the agency’s internal auditor

Pg 6: Director Duties and Responsibilities #14 Recommend to the Board the appointment or removal of internal auditor

Pg 14: Operations, Audit and Legislative Committee (OALC) Charter #2 OALC will operate as the Audit Committee for the Agency

#2a OALC will review, accept, and oversee changes to the biennial Audit Plan, and determine if the changes require Board review #2b. OALC will review and follow-up on operational, investment, employer and vendor audits

#3c. OALC will forward its recommendations to the Board regarding selection and removal of the ASRS internal auditor

Pg 16: IA Charter Reflects IAD was established by the Board of the ASRS with their charter reviewed at least triennially; charter was last revised on May 26, 2017

Employer Contracts:

The employer contracts contain the following language: COMPLIANCE WITH STATE LAW and ASRS RULES AND POLICIES – The Political Subdivision agrees to comply promptly and completely throughout the term of this Agreement with the letter and intent of Chapter 5, Title 38, Arizona Revised Statutes, the ASRS Rules and Policies and the Resolution adopted by the governing body of the Political Subdivision establishing a Supplemental Retirement Plan for its officers and employees. The Political Subdivision agrees that no retirement program, exclusive of the Supplemental Retirement Plan shall hereafter be established on behalf of its officers and employees included in the Supplemental Retirement Plan, except as authorized in Arizona Statute.

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1.3 CURRENT ACTIVITIES OF ASRS IAD:

IA Charter (from the Board Governance Handbook):

According to the IAD Charter, the Chief Internal Auditor (CIA) reports functionally to the Board via the OALC and administratively to the Director of the ASRS. A synopsis of the charter’s listed scope of work includes:

• Develop biennial audit plan • Ensure internal and external risks are identified and managed • Review reliability and integrity of financial and operating information • Evaluate compliance • Determine if operations are consistent with strategic aims and best practices • Evaluate system internal controls • Perform ad-hoc reviews • Investigate allegations of fraud, embezzlement, theft, waste, etc. • Audit employers for compliance • Audit contracts of contractors and third-party administrators for compliance

An external peer review of the IAD should be performed every five years; the last review was a self-assessment with findings independently validated and presented to the OALC in August 2016. Current Position Description - (CIA):

The current ASRS Position Description Questionnaire (PDQ) for the CIA position, which has not been updated since December 2011, ranks the grade as E3, lists the supervisor as the Director, indicates professional certifications and bachelor/master degrees are a selected preference, and details the primary job responsibilities as:

Develop/administer /report on IA plan

40%

Organize/manage IAD 20%

Manage/implement special projects

15%

Report on agency compliance/Letters of

Direction 10%

Oversee staff development

10%

Follow-up/report on external audit

findings/ recommendations

5%

CIA Duties Per 2011 PDQ

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FY 2017 Audit Plan Activities:

In July 2017 the OALC received the following status report regarding IAD’s FY 2107 activities: • Audits:

o Employer audits (25 completed): 2,798 hours o Data integrity: 542 hours o Management Fees-Agency: 331 hours o Audit follow-up: 156 hours o Refunds processing: 150 hours o Service purchase invoices: 148 hours o Fraud hotline/internal investigations: 131 hours o Census Data GASB 68: 101 hours

• Non-audits: o Requested audits/other: 149 hours o Audit plan 2018: 94 hours o Director requests: 40 hours

2018: Highlights of the new audit plan include audits of GASB 68 employer demographics, incoming correspondence, COOP, and management/administration fees in investments. 1.4 NATIONAL/INTERNATIONAL IA STANDARDS: Professional Organizations:

Institute of Internal Auditors (IIA): • International Professional Practices Framework (IPPF)

o Commonly called the Red Book o Authoritative guidance on the internal audit profession; presents internationally

consistent mandatory and strongly recommended guidance for the practice of internal auditing anywhere in the world

• International Standards for the Professional Practice of Internal Auditing o Revised October 2016, effective January 2017 o Highlights:

Independence: Must have direct access to Board and senior management and freedom to carry out responsibilities in an unbiased manner

Proficiency: Must have skills/knowledge to carry out professional responsibilities; professional certifications are recommended but not mandatory; no education level specified

External audits of IAD: Required at least every five years IA plan development: Plan must be risk-based and approved by senior

management/Board IAD should assess and make recommendations for: governance, risk

management, and controls Engagements: Should list objectives, scope, timing, resources with results

communicated Monitoring: Process to follow-up and ensure management actions have

been implemented must be established

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o Chief Audit Executive Roles Beyond Internal Auditing If the chief audit executive is asked to take on additional roles and

responsibilities outside of internal auditing (i.e. compliance or risk management activities) then independence safeguards (like the Board periodically evaluating reporting lines) need to be adhered to as insurance against the impairing or appearing to impair audit objectivity

• Global Technology Audit Guide five focus areas for project audits: o Business and IT alignment o Project Management o IT Solution Readiness o Organizational and process management o Post Implementation

• The Three Lines of Defense in Effective Risk Management and Control, January 2013: o 1st Line is frontline management (day-to-day internal control activities; owns and

manages risks; implements corrective actions) o 2nd Line is risk management and compliance (management provides guidance on

internal control requirements and evaluate adherence to defined standards; oversees risks; facilitates/monitors implementation of risk management practices, compliance)

o 3Rd line is Internal Audit (assessing and reporting on internal controls and recommending correcting/enhancing actions to management; provides independent assurance to Board/senior management concerning effectiveness of governance, risk management, and internal controls including how the first two levels of defense achieve risk management and control objectives)

COSO:

• Endorses the Three Lines of Defense model • Internal Control – Integrated Framework, May 2013

o An internal audit function is not a requirement of internal control but can enhance the scope, frequency, and objectivity of reviews

o The components and principles language does not specifically address an IAD function The Information and Communication component states internal control is

enhanced by an IAD that is independent of management and communicates directly with the Board free of management bias

The Monitoring component recommends separate (non-routine) evaluations to ensure internal control components are present and functioning should be performed by independent resources like an IAD (or external party, independent management); the Board should engage with any internal/external auditors when evaluating the entity

o Framework advocates ensuring all principles and relevant components are ‘present and functioning’ and ‘operating together’

o Ultimately management’s responsibility to meet requirements of effective internal control but can use auditors to verify/provide assurance

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• Enterprise Risk Management Framework – Integrating with Strategy and Performance, June 2017

o The components and principles language does not specially address an IAD function

• Fraud – Risk Management Guide, September 2016 o The principles language does not specially address an IAD function but the guide

gives tips on how an IAD may be best used to enhance fraud control o Mimics recommendations from the 2013 Internal Control Framework regarding

communication and evaluations o Suggests conducting a separate fraud risk assessment o Advocates a whistleblower process (both formal ‘hotline’ and other processes)

AICPA:

• Lists Statements of Auditing Standards (SASs) for independent auditors NIST:

• National Institute of Standards and Technology (NIST) 53 lists standards for technology internal auditors

COBIT:

• Control Objectives for Information and Related Technologies (COBIT) lists standards for technology internal auditors

ISO: • International Organization for Standardization (ISO) 27001 and 27002 international lists

standards for technology internal auditors Individual Certification Requirements:

• Each certification held by internal audit staff requires specific standards be met to maintain the certification including CPE

Federal GAO Guidance:

Yellow Book: • A book of standards and guidance for auditors and audit organizations outlining the

requirements for audit reports, professional qualifications for auditors, and audit organization quality control

• Auditors of federal, state, and local government programs use these standards to perform their audits and produce their reports

1.5 NATIONAL/INTERNATIONAL TRENDS AND TOPICS IN IA: KPMG (Australia):

• Implementing Lean processes: o Implement Lean process reviews to identify control weaknesses and opportunities

to streamline processes which is an expansion from the traditional role of IA to ensure agency identifying correct risks and implementing proper controls

o https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-lean.html

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-lean.html

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-lean.html

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• Implementing strategy audits:

o Help management identify the key risks to strategy success and provide assurance that key controls to manage those risks are sound Strategy risk audits (identify risks from pursuing certain strategic goals,

validate assumptions, review consistency of reasoning, etc.) Strategy process audit (focus on assessing the formulation, implementation,

evaluation and control of the strategic management process or (the content of) the formulated strategy itself)

o https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-strategy.html

• Corporate culture reviews: o Evaluate soft controls that create corporate culture like attitudes, behavior and how

things are actually being done (what actions are rewarded, does communication to employees support stated values, decision making processes, etc.)

o https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-culture-soft-controls.html

• Emerging risks: o IA can help management identify emerging risks by keeping a macroeconomic view

(where the agency sits in a competitive environment, its customers, suppliers, etc.) o Expand to viewing the interconnectivity of risks to help management put in place

controls to mitigate risks collectively rather than each risk on its own o IA should consider culture and employees when assessing for cybercrime and fraud o https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-emerging-

risks.html Association of Public Pension Fund Auditors (APPFA):

• Recent APPFA conferences have focused on topics like: o New approaches to employer auditing: CalPERS has Audit and Employer Relations

departments collaborate; Audit conducts reviews then forwards results to Employer Relations (ER). ER then contacts the agency and provides direction and oversight to outline a resolution plan. Agencies are given four months to resolve the issue or further action is taken.

o Incorporating Lean into audits: The Government Operations Agency identified that IA departments can use Lean and Six Sigma (among other frameworks) in audit cycles and enhance findings to improve audit processes and contribute to improved organization performance

o Other topics included: Office of Foreign Asset Control regulations, GASB 68 compliance, controlling pension administration costs, auditing external real estate investment managers, oversight of large IT implementation projects and auditing information security and cybersecurity information system controls

IIA:

• Offers courses on Lean Six Sigma Tools for Internal Audit Planning, COSO/risk auditing, root cause analysis, and technology auditing among many others

• Expand audit focus and tools:

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-strategy.html

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-strategy.html

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-culture-soft-controls.html

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-culture-soft-controls.html

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-emerging-risks.html

https://home.kpmg.com/au/en/home/insights/2016/09/internal-audit-emerging-risks.html

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o Audit communications traditionally not reviewed like operations reporting, analyst presentations, etc. meant to communicate information to stakeholders and the Board

o Audit environmental, health and safety risks o Use data analytics in audit processes o https://dl.theiia.org/AECPublic/2017-NA-Pulse-of-Internal-Audit-Courageous-

Leadership-Instilling-Confidence-from-Within.pdf • Root cause(s) and expanding reporting:

o Auditors should brainstorm with a team to identify all potential root causes to a problem and identify multiple opportunities to mitigate risk

o Recommends IA offer meaningful recommendations to address the issue once root cause(s) identified

o Internal Auditor, August 2017, p53 • Outsourcing IA:

o Well-resourced and independent IAD of FTEs remains the best option o Governance functions like oversight and IA responsibility cannot be outsourced o https://iaonline.theiia.org/blogs/chambers/2017/Pages/Outsourcing-Internal-

Auditing-Dos-and-Donts.aspx • Benchmarking:

o IIA offers a Benchmarking Report via their Audit Intelligence Suite o https://www.theiia.org/centers/aec/Pages/benchmarking.aspx

Deloitte:

• Expand IAD focus: o Audit strategic planning process including participants and assumptions, third party

management, risk culture, framework for identifying/managing strategic and emerging risks, media

o Increase involvement in digitation (converting transactions, services, etc. online) o Develop forward-looking analytics for a dynamic audit plan, an integrated risk

assurance to allocate audit resources where the 1st and 2nd lines of defense are not as sufficient, cyber auditing skills, and new ways of reporting that are less narrative-based and include visualization tools and dashboards

o Internal audit insights, High-impact areas of focus 2017 Protiviti and ISACA:

• Protiviti is a global consulting firm that delivers objective insights in business problems in technology, business process, analytics, risk, compliance, transactions and internal audit

• ISACA is a global technology professional association for IT audit/assurance, governance, risk and information security professionals

• IAD involvement in IT: o Survey of 1062 IT audit and Internal Audit leaders/professionals found

“cybersecurity and privacy issues, along with infrastructure management and emerging technologies, rank as top technology challenges organizations face” and “IT audit is also becoming more involved in major technology implementation projects within organizations.”

o There is opportunity for organizations to derive the most value from their major IT projects by engaging IT audit earlier rather than downstream in the projects

https://dl.theiia.org/AECPublic/2017-NA-Pulse-of-Internal-Audit-Courageous-Leadership-Instilling-Confidence-from-Within.pdf

https://dl.theiia.org/AECPublic/2017-NA-Pulse-of-Internal-Audit-Courageous-Leadership-Instilling-Confidence-from-Within.pdf

https://iaonline.theiia.org/blogs/chambers/2017/Pages/Outsourcing-Internal-Auditing-Dos-and-Donts.aspx

https://iaonline.theiia.org/blogs/chambers/2017/Pages/Outsourcing-Internal-Auditing-Dos-and-Donts.aspx

https://www.theiia.org/centers/aec/Pages/benchmarking.aspx

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o A growing number of IT audit leaders are reporting directly to the CEO (13% in North America, 26% in Europe) and it is possible the chief audit executive is serving as the IT audit director

o 90% of large companies conduct IT risk assessments but approximately 55% do so only on an annual or less frequent basis. An approach that includes continually reviewing the IT landscape and adjusting IT audit plans according is suggested.

o PR Newswire; Washington, February 2, 2017 1.6 SURVEYS AND TRENDS: NASRA survey results:

• 36 systems in 28 states responded to the survey; conducted in November 2017 • 34 systems (94%) have IA functions, 27 systems use internal staff for IA with only 1

completely outsourcing, most IADs report functionally to the Board and administratively to the Director

• 20 systems (56%) have their Board as the source for the IAD requirement while only 9 have statutory requirements

• 29 systems have between 1-5 IAD team members, 4 systems have 6-12 IAD staff, 1 system claimed 60 IAD staff members

o Areas of focus include: data analytics IT audits including oversight of network application upgrades Cybersecurity internal control testing, risk management operational and employer audits

• 8 systems do not perform strategic investment policy compliance and manager fee accuracy testing this function

36

18

13

7

Total Survey Respondents Disbursement Testing Employer ComplianceTesting

Investment PolicyCompliance & Mgr Fee

Accuracy Testing

Quality Assurance Testing Performed by IADs per NASRA Survey

10

APPFA survey results:

• In November 2017 APPFA posted results from a poll of their members requesting information on number of IAD employees and reporting structure

• 13 systems replied • All 13 systems (100%) report functionally to the Board/Board Committee; 10 systems report

administratively to the Executive Director with the other systems reporting administratively to a Chief Risk Officer or Chief Operating Officer

• 4 systems have IAD staff of 1-4; 5 systems reported IAD of 6-10; one reported IAD staff of 34 and 3 systems did not provide staff counts

North American Pulse of Internal Audit survey results:

• Reported on IIA website; 538 respondents including 460 Chief Audit Executives (CAE) and 78 Director/Senior Managers; data collected from October 2016 – Nov 2016

• 59% of all organizations have fewer than 10 IAD FTEs ; public-sector organizations have the biggest share of smaller IADs at 1-3 FTEs

• Most CAEs report functionally to a board-level group and administratively to a Chief Finance Officer (CFO) or Chief Executive Officer (CEO)

• CAEs devote one-third of audit effort to risks aligned with organization strategy • Top risks identified are cyber, compliance, IT, third-party, and operational • Approximately 30 - 45% expect to increase audit effort in the areas of Enterprise Risk

Management, fraud risks and governance and culture • https://dl.theiia.org/AECPublic/Internal-Audit-Management-Insights-A-Pulse-of-Internal-

Audit-Supplemental-Report.pdf Other Arizona Agencies: All state agencies do not have an Internal Audit Department:

• Larger agencies like the Arizona Department of Administration ( ADOA), Revenue, and the Arizona Department of Transportation (ADOT) have IA departments

• Agencies were contacted that were either close to the size of the ASRS or had functions in line with the ASRS:

o Agriculture: No IA group o Corporation Commission: No IA group o Industrial Commission: No IA group o Parks: No IA group, they do conduct self-audits o Gaming: No IA group, have Auditors that audit casinos o Financial Institutions: No IA group o PSPRS: One internal auditor, one compliance auditor o Treasury: No IA group, have audit procedures but no dedicated personnel o Revenue: One FTE in IA o ADOT: Team of 19 (14 auditors and 5 supervisors/managers)

Other state agencies’ IAD size, certifications, etc.:

• Gaming: Preferred BS-Acct. or related, 1 years acct./audit experience, CPA/CIA/CMA/CFE • Revenue: CPA or CIA preferred • ADOT: CIA and then CPA are preferred certifications

https://dl.theiia.org/AECPublic/Internal-Audit-Management-Insights-A-Pulse-of-Internal-Audit-Supplemental-Report.pdf

https://dl.theiia.org/AECPublic/Internal-Audit-Management-Insights-A-Pulse-of-Internal-Audit-Supplemental-Report.pdf

11

Certification Trends:

• Certified Public Accountant (CPA), Certified Internal Auditor (CIA), and Certified Fraud Examiner are generally requested for Internal Audit roles; CPA and CIA tend to be the most requested certifications

• The Certified Information Systems Auditor (CISA) is desired for Information Systems (IS)/IT Auditor roles

• Job Advertisements for Chief Auditor (or similar executive level roles) tend to request a combination of the certifications above and also request a Bachelor’s Degree or higher.

o Note: other relevant professional designations exist but are not as common as the noted certifications above

Salary Benchmarking:

• When considering government environment, state grade parameters and ASRS internal equity, a general price point for the ASRS would be determined by reviews of:

o Other pension fund salaries o The marketplace o Arizona State Auditor General o ADOA o Other agencies/organizations with a similar profile

Agenda Item #7

Director’s Report: 7a - Compliance

7b - Operations

7d - Cash Flow Statement 7e - Appeals 7f - Employers Reporting

Agenda Item #7a

Director’s Report Compliance


TOLL FREE OUTSIDE METRO PHOENIX AND TUCSON 1 (800) 621-3778 EMAIL ADDRESS: [email protected] • WEB ADDRESS: WWW. AZASRS.GOV


Director

MEMORANDUM TO: Mr. Kevin McCarthy Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director Mr. Bernard Glick, Chief Internal Auditor DATE: January 4, 2018 RE: Internal Audit Review of Refunds Processed for the Period July 1, 2017 to December

31, 2017 The Internal Audit Division (IAD) tested a sample of all refunds sent to members (6,932) for the period of July 1, 2017 through December 31, 2017. A total of 351 refunds were tested for accuracy of the calculation. We used judgmental sampling to determine our selection of refund recipients. A reportable error is one in which the error represents more than 1% of the gross refund. From the testing of the 351 samples selected, we found no reportable errors for this time period. cc: Anthony Guarino, Deputy Director and Chief Operations Officer Dave King, Assistant Director, Member Services Division Erin Higbee, Assistant Director, Financial Services Division

Sara Orozco, Senior Management Analyst Brian Crockett, Management Analyst


TOLL FREE OUTSIDE METRO PHOENIX AND TUCSON 1 (800) 621-3778 WEB ADDRESS: WWW. AZASRS.GOV


Director

MEMORANDUM TO: Mr. Kevin McCarthy Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director

Mr. Bernard Glick, Chief Internal Auditor DATE: January 4, 2018 RE: Internal Audit review of Service Purchase Cost Invoices for the six months ended

December 31, 2017 The Internal Audit Division randomly tested a sample of all service purchase invoices sent to members from July 1, 2017, through December 31, 2017 (1679). A total of 357 invoices were tested. They were reviewed for accuracy of both the credited service to the member and the cost of the service purchased. The following is the breakdown of the invoices tested in our completed sample: 91 Forfeited Service (FS); 49 Other Public Service (OPS); 9 Military Service (MS); 6 Leave of Absence (LOA), and 202 Contributions Not Withheld (CNW). The sample size was determined based on the expected rate of an error occurring in relation to the entire population, (plus or minus 5 percent). During the six months tested, we found no reportable errors. The agency standard for quality, based on the Strategic Plan, is 98 percent for the sample tested. 357 correct cost letters out of 357 sampled = 100 percent quality rating. cc: Anthony Guarino, Deputy Director and Chief Operations Officer

Dave King, Assistant Director, Member Services Division Erin Higbee, Assistant Director, Financial Services Division Sara Orozco, Manager, Strategic Planning and Analysis Brian Crockett, Sr. Strategic Planning Analyst

Agenda Item #7b

Director’s Report Operations

Member Advisory Center: Phone

67 54 33 36 14 35 199 44 66 76 31 18

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Timeliness (average wait time in seconds)0

5,000

10,000

15,000

20,000


Volume comparison of calls by month and year

2017 179,949 ( 3.9% )

2016 173,227

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Timeliness percent answered in 20 seconds or less

Rolling Year Avg. = 63%

Objective

90%

91%

92%

93%

94%

95%

96%

97%

98%

99%

100%


Resolution Rate percent answered on first contact

Rolling year avg 99%

0%

2%

4%

6%

8%

10%

12%

14%


Abandonment Rate percent of calls abandoned

Rolling Year Avg. = 3.9%

Objective

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Quality of agent response to member inquiries

Rolling Year Avg. = 97.3%89%

9%

1% 1%

Overall Satisfaction 4Q CY2017

Very Satisfied

Satisfied

Dissatisfied

Very Dissatisfied

98% satisfied

1

Member Secure Messages (MSM)

6.0 2.0 1.8 2.5 2.1 2.5 3.2 2.5 1.7 2.3 1.9 2.8 19% 50% 53% 14% 17% 12% 10% 22% 72% 45% 60% 36%

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Timeliness (average response in days) Timeliness (service level)

0

250

500

750

1,000

1,250

1,500

1,750

2,000


Volume comparison of secure messages received by month and year

Jan17-Dec17= 17,966 ( 20.3% )

Jan16-Dec16 = 14,940

0 200 400 600 800 1,000 1,200

Pension Status

Payment Status

Refund

New Retiree

Health Insurance

Number of messages

Reason for Contact top reasons -Dec 2017

51% 34%

6%

4% 3% 2%

Overall Satisfaction 4Q CY2017

Very Satisfied

Satisfied

Somewhat Satisfied

Somewhat Dissatisfied

Dissatisfied

Very Dissatisfied

91.3% satisfied

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Timeliness percent of secure messages responded to within 1 business day

Jan17-Dec17= 34% ( -44.4% )

Jan16-Dec16 = 61%

2

One-on-One Counseling

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Appointments 1 0 0 1 0 1 0 0 1 0 1 1

Walk-Ins 4 6 5 5 5 6 5 4 0 4 5 3

Reception/MAC Express 0 0 0 0 0 0 0 0 0 0 0 0

Health Insurance 7 3 4 7 4 6 5 4 7 6 7 4

LTD Vendor 0 0 0 0 0 0 0 0 0 6 0 0

Timeliness (average wait time in minutes)

50%

60%

70%

80%

90%

100%


One-on-One Timeliness percent seen within objective wait time

Strategic Plan ObjectiveAppointments Rolling Year Avg. = 98.33%Walk-ins Rolling Year Avg. = 97.75%Reception/MAC Express Rolling Year Avg. = 99.77%Health Insurance Rolling Year Avg. = 91.00%

0 100 200 300 400

Survivor Benefits

Retired:Issues/Updates

Forms:Rqst/Sbmt,…

New Retirement

Health Insurance

Number of Visits

Reasons for Visit top five reasons - Dec 2017

0

500

1,000

1,500

2,000


Volume number of one-on-one counseling sessions by type

LTD Vendor, HI Vendor and MAC Express Jan 17-Dec 17 ( 8,860 )

Walk-ins Jan 17-Dec 17 ( 2,195 )

Appointments Jan 17-Dec 17 ( 4,595 )

Total Jan 16-Dec 16 = 15,286

Total Jan 17-Dec 17 = 15,650 ( 2% )

80%

17%

3% 0% 0%

0%

Overall Satisfaction 4th Quarter 2017

Completely Satisfied

Very Satisfied

Satisfied

Dissatisfied

Very Dissatisfied

Completely Dissatisfied

100% satisfied

3

Outreach Education and Benefit Estimates

1 0 1 0 0 0 0 0 0 0 0 0


Benefit Estimate Timeliness (average TAT in days)

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500


Total Meeting Attendees by type of meeting

Know Your Insurance Attendance Jan 17-Dec 17 = 2,702

Route 3 Webinar Attendance Jan 17-Dec 17 = 377

Route 3 In-Person Attendance Jan 17-Dec 17 = 3,499

Route 4 Attendance Jan 17-Dec 17 = 2,403

Total Attendance Jan16-Dec16 = 9,147

Total Attendance Jan 17-Dec 17 = 8,981 ( -2% )

0

200

400

600

800

1,000

1,200

1,400

1,600


Benefit Estimate Volume comparison by month and year

Special Projects (Unrequested) Jan 17-Dec 17 = 2,584

All Requested Jan 17-Dec 17 = 2,986

Total Benefit Estimates Jan 16-Dec 16 = 7,647

Total Benefit Estimates Jan 17-Dec 17 = 5,570 ( -37% )

60%

70%

80%

90%

100%


Benefit Estimate Timeliness percent completed within 3 business days

Strategic Plan Objective


Member Satisfaction

73%

25%

0% 0% 1% 1% Route 3

4th Quarter 2017

Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

98% satisfied

78%

22%

0% 0% 0% 0% Route 4

4th Quarter 2017

Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

100% satisfied

53% 41%

0% 0% 3% 3% Benefit Estimates 4th Quarter 2017

Very SatisfiedSatisfiedSomewhat SatisfiedSomewhat DissatisfiedDissatisfiedVery Dissatisfied

94% satisfied

4

Service Purchase

1 1 2 1 1 2 2 1 1 1 2 1 7 4 4 5 4 4 3 3 4 7 5 8

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

1.4 1.4 1.5 2.0 2.5 2.5 2.5 2.2 2.2 2.4 2.0 2.0


Timeliness (average turnaround time in business days) Timeliness (average turnaround time in business days)

Timeliness (rolling year average turnaround time in business days)

Requests

Pending

as of

Dec 31, 2017

Cost

Invoices

Pending

165

Payments

Pending

19

0

250

500

750

1,000

1,250

1,500

1,750


Total Volume comparison by month and year

PDAs Processed Jan17-Dec17 = 31 ( -45% ) PDA Contracts Issued Jan17-Dec17 = 159 ( -48% )

Lump Sum Payments Jan17-Dec17 = 3,177 ( 53% ) Invoices Jan17-Dec17= 3,133 ( 35% )

Requests Jan17-Dec17 = 4,604 ( 33% ) Total Workload Jan16-Dec16 = 6,898

Total Workload Jan17-Dec17 = 11,104 ( 38% )

40%

50%

60%

70%

80%

90%

100%


Lump Sum Timeliness percent within 10 business days



40%

50%

60%

70%

80%

90%

100%


Cost Invoices Timeliness percent within 15 business days



30%

40%

50%

60%

70%

80%

90%

100%


Payroll Deduction Agreement Timeliness (Rolling Year) percent within 5 business days



95%

96%

97%

98%

99%

100%

July-Dec Jan-June

Cost Invoice Quality Rating FY 2017


FY 2017

23%

50%

13%

0% 0%

14% Overall Satisfaction 4th Quarter 2017

Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

86% satisfied

5

Refunds

1 1 1 2 1 1 1 1 1 2 1 2

Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec

Timeliness (average turnaround time in business days)

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250


Volume comparison by month and year

Requests Jan17-Dec17 = 13,013 ( -1% )

Requests Jan16-Dec16 = 13,156

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%


Timeliness percent disbursed in 10 business days



0

20

40

60

80

100

120

140

160

180

200


Requests Pending

Rolling Year

95%

96%

97%

98%

99%

100%

July - Dec Jan - June

Refund Quality Rating FY 2017

FY 17

62%

27%

4% 2%

1%

4%


Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

90% satisfied

6

New Retiree and Pension Payroll

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


13 22 26 22 8 12 11 13 12 19 29 13


7 13 11 10 8 13 8 5 6 3 6 6


Pension Payment (percent disbursed by 1st of the month)

First Payment Timeliness (average turnaround time in days)

Adjustments Timeliness (average turnaround time in days)

0

200

400

600

800

1000

1200

1400

1600

1800

2000


First Payment Volume comparison by month and year

Jan17-Dec17 = 9,161 ( 0% )

Jan16-Dec16 = 9,117

50%

60%

70%

80%

90%

100%


First Payment Timeliness percent disbursed in 10 business days


125,000

130,000

135,000

140,000

145,000

150,000


Pension Volume comparison by month and year

Jan17-Dec17 = 1,708,170 ( 4% )

Jan16-Dec16 = 1,644,729

0

200

400

600

800

1000

1200


Audits & Adjustments comparison by month and year

Adjustments Rolling Year = 562Audits Rolling Year = 6,598

50%

60%

70%

80%

90%

100%


Adjustments Timeliness Percent completed in 20 business days

Strategic Plan ObjectiveRolling Year Avg. = 99%

63%

27%

5% 3%

1% 1%


Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

95% satisfied

7

Survivor Benefits

Non Retired

3 4 3 3 3 3 3 5 4 4 6 4

Retired

1 2 1 2 2 1 1 1 1 1 2 1


Lump Sum (Non-Retired)

4 4 4 3 3 3 5 4 3 3 4 4

Annuity (Retired and Non-Retired)

4 3 2 2 3 2 3 2 2 2 2 2


Packet Timeliness (average TAT in days)

Payment Timeliness (average TAT in days)

0

100

200

300

400

500

600

700


Volume number of death notifications received

Non-Retired Jan17-Dec17 = 1,107 ( 15% )

Retired Jan17-Dec17 = 3,128 ( 7% )

Total Jan16-Dec16 = 3,857

Total Jan17-Dec17 = 4,235 ( 9% )

0

100

200

300

400

500


Packet Volume number of beneficiary packets

Non-Retired Jan17-Dec17 = 1,012 ( -8% )

Retired Jan17-Dec17 = 3,120 ( 5% )

Total Jan16-Dec16 = 4,071

Total Jan17-Dec17 = 4,152 ( 2% )

0

50

100

150

200

250


Payment Volume number of beneficiary payments

Lump Sum Jan17-Dec17 = 1,046 ( 13% )Annuity Jan17-Dec17= 839 ( 11% )Total Jan16-Dec16 = 1,569Total Jan17-Dec17 = 1,906 ( 18% )

20%

30%

40%

50%

60%

70%

80%

90%

100%


Packet Timeliness percent mailed in 15 business days or less


Non-Retired Jan17-Dec17 = 95%

Retired Jan17-Dec17 = 100%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%


Payment Timeliness percent paid in 10 business days or less


Lump Sum Jan17-Dec17 = 96%

76%

19%

0% 0% 3% 2%


Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

95% satisfied

8

Public Website: www.azasrs.gov

Followers: 2422 (+1%)

Followers: 479 (+1%)

91%

9%

92%

8%

82%

18%

82%

11% 6%

79%

14%

7%

76%

18%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Deskto

p - 20

12

Mo

bile - 20

12

Deskto

p - 20

13

Mo

bile -2

01

3

Deskto

p - 20

14

Mo

bile -2

01

4

Deskto

p - 20

15

Mo

bile -2

01

5

Tablet - 2

015

Deskto

p - 20

16

Mo

bile -2

01

6

Tablet - 2

016

Deskto

p - 20

17

Mo

bile -2

01

7

Tablet - 2

017

Website Use by Device Website Use by Device Website Use by Device Website Use by Device

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


Volume comparison of public website visits by month and year

2017 = 1,44,476 (+1.1%)

2016 = 1,131,516

0 2,000 4,000 6,000 8,000 10,00012,000

Tax Info

Healthcare

Benefit Payments

Retirement Central

Estimate Benefits

Number of Visits

Most Visited Public Pages top five page visits Dec 2017

Social Media Dec 2017

0

1

2

3

4

5

6

7

8

9

10

FY20

15

FY2

016

FY2

017

Secure

Public

Website Use by Device Engagement (Avg session Duration by FY)

3m 33s 3m 50s

3m 13s

8m 17s 8m 6s 8m 15s

9

http://www.google.com/imgres?imgurl=http://shcm.org/wp-content/uploads/2014/08/facebook-logo.jpg&imgrefurl=http://shcm.org/blog/2014/08/07/are-you-a-facebook-junkie/&h=185&w=550&tbnid=MzFNGgj1wLq3ZM:&zoom=1&docid=wduw6ozT5xob-M&ei=XxP1U6PKIsjdoAST1IDwDg&tbm=isch&ved=0CCYQMygKMAo&iact=rc&uact=3&dur=720&page=1&start=0&ndsp=31

http://www.google.com/imgres?imgurl=http://shcm.org/wp-content/uploads/2014/08/facebook-logo.jpg&imgrefurl=http://shcm.org/blog/2014/08/07/are-you-a-facebook-junkie/&h=185&w=550&tbnid=MzFNGgj1wLq3ZM:&zoom=1&docid=wduw6ozT5xob-M&ei=XxP1U6PKIsjdoAST1IDwDg&tbm=isch&ved=0CCYQMygKMAo&iact=rc&uact=3&dur=720&page=1&start=0&ndsp=31

Secure Website: secure.azasrs.gov

This

month

12mo

Min

12mo

Max

12mo

Avg

Objecti

ve

HI 82% 35% 86% 66% 80%

En

roll

96% 87% 98% 94% 99%

Re

f

88% 79% 88% 83% 90%

Re

t79% 67% 79% 75% 90%

Ad

d

79% 73% 87% 79% 75%

Be

ne

81% 82% 88% 85% 75%

Ta

x

87% 69% 88% 79% 75%

DD 65% 37% 65% 53% 75%

Historical Comparison

of Online Usage

Total online

79%

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Banking

Taxes

Beneficiaries

Address

Retire

Refund

Enrollment

Health Ins

Self Service Transactions Dec 2017

Online = 9,598Manual = 2,611Smart Forms

0%

20%

40%

60%

80%

100%

Active Inactive Alt Payees Retired Total

Email Addresses by member type

Jan 2017

0

20,000

40,000

60,000

80,000

100,000

120,000


Volume comparison of secure website visits by month and year

2017 = 1,180,964 (+0.9%)

2016 = 1,170,490

Refund

MemberStatement

Beneficiary

AccountInformation

Benefit Estimator

Number of Visits

Most Visited Secure Pages Dec 2017 Objective = 80%

0%

20%

40%

60%

80%

100%

Active Inactive Alt Payees Retired Total

Registration Rates by member type

Jan 2017 (^6%)Jan 2016

10

Agenda Item #7c

Director’s Report Budget & Staffing

Base Operating

Appropriations +

Long Term Disability

Appropriations +

Pension Payroll, Rent, Actuarial Fees

Continuous Appropriations =

Base Administrative

Budget Subtotal +

Automation Upgrades Special Line Item Appropriations +

Benefits Disbursement Project

Continuous Appropriations =

Administrative Budget Total

Personal Services (PS)Salaries and wages 7,161,500 253,400 7,414,900 390,100 212,300 8,017,300 Variable Compensation Strategies Plan 24,200 24,200 24,200 Investment Incentive Compensation Plan 212,100 212,100 212,100

Total PS 7,397,800 - 253,400 7,651,200 390,100 212,300 8,253,600 Employee Related Expenses (ERE)Employer costs - benefits, taxes, charges 2,916,000 81,100 2,997,100 117,000 82,800 3,196,900

Total ERE 2,916,000 - 81,100 2,997,100 117,000 82,800 3,196,900 Professional and Outside Services (P&O)LTD Program administration 655,000 655,000 655,000 Pension payroll disbursement processing 414,200 414,200 414,200 IT Software Development 474,400 109,700 584,100 321,900 81,000 987,000 Actuarial and benefit consulting services 161,700 161,700 161,700 IT security professional services 272,600 200 272,800 272,800 Legal fees 263,000 263,000 - 263,000 Other outside services 27,800 4,100 31,900 31,900

Total P&O 1,037,800 655,000 689,900 2,382,700 321,900 81,000 2,785,600 TravelIn-state 13,800 13,800 13,800 Out-of-state 10,900 10,900 10,900

Total Travel 24,700 - - 24,700 - - 24,700 Other Operating ExpendituresOffice rent 862,700 862,700 862,700 Software licenses and support 398,900 398,900 398,900 Telecommunications 134,700 134,700 134,700 Risk management insurance premiums 150,600 150,600 150,600 Dues, subscriptions, publications 55,400 85,900 141,300 141,300 Postage and delivery 57,900 7,200 65,100 65,100 Education, training and conferences 13,500 13,500 13,500 Equipment repair and maintenance 23,500 23,500 23,500 Other operating supplies 42,600 42,600 42,600 External printing and mailing newsletters 15,400 15,400 15,400

Total Other Operating Expenditures 892,500 - 955,800 1,848,300 - - 1,848,300 EquipmentFurniture purchases/replacement 49,100 49,100 49,100 Network, server, PC and devices 14,900 14,900 - 14,900

Total Equipment 64,000 - - 64,000 - - 64,000 TOTAL 12,332,800$ 655,000$ 1,980,200$ 14,968,000$ 829,000$ 376,100$ 16,173,100$

APPROPRIATED / BUDGETED AMOUNTS 22,667,700$ 2,500,000$ 4,441,200$ 29,608,900$ 1,409,100$ 956,000$ 31,974,000$

% EXPENDED YTD 54.4% 26.2% 44.6% 50.6% 58.8% 39.3% 50.6%% OF FISCAL YEAR ELAPSED 58.3%

Administrative Projects BudgetBase Administrative BudgetFY 2018 ASRS Budget ReportAdministrative Expenses(Expenditures to Date as of January 31, 2018)

FY 2018 Budget Report Page 1

FY 2018 ASRS Budget ReportInvestment Expenses EXPENDED YTD

(as of January 31, 2018)

ESTIMATEDEXPENSES

(as of January 2018)

ESTIMATED EXPENSES

AS % OF TOTAL AUM

ESTIMATEDEXPENSES PER MEMBER

Investment Management ExpensesInternal Investment Management

Salaries and benefits 874,000$ 1,360,600$ Investment Incentive Compensation Plan (ICP)* 253,200$ 253,200$ Travel, education and training, rent, and other operational expenses 130,200$ 326,000$

Public MarketsExternal investment management fees 17,843,200$ 45,235,300$ Transactional and other fees 694,200$ 4,000,000$

Private MarketsPrivate and opportunistic equity management fees 26,759,900$ 50,657,000$ Private and opportunistic equity performance incentive and other fees** 31,745,600$ 31,745,600$

Real estate, farmland and infrastructure management fees 4,877,100$ 8,644,500$ Real estate, farmland and infrastructure performance incentive and other fees** 8,367,100$ 8,367,100$

Private and opportunistic debt management fees 5,724,200$ 16,386,000$ Private and opportunistic debt performance incentive and other fees** 9,064,700$ 9,064,700$

Custodial Banking, Security Lending and Master Cash STIF Fees 592,000$ 2,900,000$ Investment Management Expenses Subtotal 106,925,400$ 178,940,000$ 0.45% 305.20$

Investment Related Consulting, Legal and Information Services ExpensesInvestment Consulting Services 1,516,800$ 5,182,300$ Investment Related Legal Services 1,090,900$ 2,820,000$ Investment Electronic Information Services 570,000$ 2,550,200$ External Financial Consulting Services 77,000$ 113,500$

Services Expenses Subtotal 3,254,700$ 10,666,000$ 0.03% 18.19$ Total Investment Expenses 110,180,100$ 189,606,000$ 0.48% 323.39$

FY 2018 ASRS Budget ReportTotal Administrative and Investment Expenses EXPENDED YTD

(as of December 31, 2017)

ESTIMATEDEXPENSES

(as of December 2017)

ESTIMATED EXPENSES

AS % OF TOTAL AUM

ESTIMATEDEXPENSES PER MEMBER

Administrative Expenses (from Page 1 excluding ICP)* 15,919,900$ 31,720,800$ 0.08% 54.10$ Investment Expenses (including ICP)* 110,180,100$ 189,606,000$ 0.48% 323.39$

Total Expenses 126,100,000$ 221,326,800$ 0.56% 377.49$ ASRS Estimated Total Market Value of Assets Under Management (AUM) as of December 31, 2017 39,830,379,000$

ASRS Total Membership as of June 30, 2017 586,300

* The ICP is paid with base operating budget appropriated dollars.** Due to the nature of the investments and contingent variables, estimated annual performance incentive and other certain fees and expenses that are contractually agreed upon are not projected and are only reported, on a cash flow basis, when identified and paid. Amounts in the Estimated Expenses column are equal to the actual Expended YTD.


Fiscal Year 2018 Budget Report Summary

The Arizona State Retirement System (ASRS) administrative and investment costs are expended in accordance with Arizona Revised Statutes (A.R.S.). The ASRS utilizes both appropriated and continuously appropriated funds. Column amounts represent the expenditures in each category to date. Information on the total appropriated and estimated planned annual expenses are also included as a guide to the rate of spend during the fiscal year. Expenditures to date include sixteen (16) pay periods (61.5% of the annual payrolls) in FY 2018. Appropriations Columns labeled as appropriations represent funds that have been approved by the Legislature and the ASRS Board for fiscal year July 1, 2017 through June 30, 2018, and include:

1. Base operating budget – funds for administrative salaries and employee benefits, supplies, equipment and ongoing costs associated with member information and financial systems for the ASRS.

2. Long Term Disability (LTD) Program – funds for the administration costs of the LTD program.

3. Automation upgrades – funds for the Oracle Forms and Reports Modernization project. Amounts

appropriated in FYs 2015 to 2017 are non-lapsing, and the ASRS has the ability to utilize the unspent portion of the funds to complete the project.

Continuous Appropriations Columns labeled as continuous appropriations represent funds that, in accordance with A.R.S. § 38-721(C), are continuously appropriated in the amount deemed necessary by the Board and include:

1. Administrative costs Pension Payroll - funds for costs associated with administering retiree pension benefits and

disbursements, including third-party payroll administration fees, postage, benefit-related consulting fees, and the ASRS Benefits Disbursement project.

Rent – funds for rent required as tenants for occupancy at 3300 N Central Avenue in Phoenix and in the leased office space in Tucson.

Actuarial fees – funds for actuarial services related to plan design, administration and valuations.

2. Investment management and related consulting fees necessary to meet the Board’s investment objectives Internal investment management – funds for ASRS Investment Management Division (IMD) staff

salaries and employee benefits, travel, education and training, rent, and other operational costs. However, the Investment Incentive Compensation Plan (ICP) is paid with base operating budget appropriations.

External investment management – funds for: - Public Markets investment management fees and transactional and other fees, which include

foreign taxes and commissions on derivatives and other incidental costs. - Private Markets investment management fees and performance incentive and carried interest

fees, which are only paid if earned - upon successful performance of the manager after other return criteria are met – or incurred, and other contractually agreed-upon fees and expenses. Due to the nature of the investments and contingent variables, estimated annual performance incentive and other fees are not projected and are only reported, on a cash flow basis, when identified and paid.

Consulting fees – funds for Investment-related consulting and legal fees, electronic information

services and subscriptions, custodial banking administrative fees, and external auditing service fees.

The investment continuous appropriations budget report includes projected expenditures for the current fiscal year. Actual expenditures are reported monthly and estimated annual expenses are reviewed and adjusted quarterly. The ASRS Estimated Total Market Value of Assets under Management (AUM) and ASRS Total Membership values are updated as period ending amounts are finalized.


1

Arizona State Retirement System Staffing Report

(January 31, 2018)

241 Full Time

Equivalents (FTEs)

New Hires

New Exits

Vacancies Vacancy

Rate ASRS by Division Director's Office/ Public Affairs/ Information Security (DIR)/ Leg. Liaison 20 0.0 0.0 5.0 25.0% Administrative Services Division (ASD) 14 0.0

0.0 0.25

1.79%

Financial Services (FSD) 76 0.0

0.0 11.75

15.46% Technology Services (TSD) 52 1.0

1.0 6.0

11.54%

Internal Audit (IAD) 4 0.0

1.0 1.0

25.0% Investment Management (IMD) 12 0.0

0.0 2.0

16.67%

Member Services (MSD) 63 5.0

2.5 4.0 6.35% 241 6.00 4.50 30.00 12.45%

Turnover January

2018 New Hires

January 2018 Exits

Total Exits (Last 12 Months)

Annualized Turnover %

6 4.50 36.50 16.36%

Turnover benchmarks: Arizona State Personnel System 2017: 18.1% BLS: State/Local 2016: 18.8% Compdata – West: Not-for-profit 2017: 17.5%

Assumed Vacant Positions As a result of strategic actions taken to date to streamline processes and due to the purposeful investment in technology, ten vacant FTEs have been identified to be eliminated. Recruitments

• Position(s) under recruitment include: DO Administrative Project Analyst, FSD Financial Reporting Manager, FSD Investment Accountant, , and TSD: Service Desk Supervisor

• Position(s) approved for recruitment: TSD: Network Infrastructure roles (x2) and TSD: Software Engineer, recruitments will start February 2018

Impact of Staffing (Vacancies, Recruitments, Internal Transfers) on ASRS Operational Performance

2

Agency Divisions Services and Functions Staffing

Impact Comments

Impact of Staffing on ASRS Operations: Green = Normal risk Yellow = Greater than normal risk Red = Negative impact

MSD MAC (Call Center)

In January 2018 strategic objectives were not met. Recruitment for five positions has been completed; the new FTEs will be in the call center full-time in February. Greater than normal risk is expected to remain until the new staff are fully trained.

MSD Member Education

In January 2018 Strategic Objectives were mostly met. An additional FTE was added to meet the needs of the team. Two exits occurred during December/January. Recruitment has been completed to fill two positions. Greater than normal risk is expected to remain until remaining position is filled and new staff are fully trained.

MSD E-mail and Written Correspondence

MSD Phoenix: Appointments/Walk-ins/Outreach

MSD Tucson: Appointments/Walk-ins/Outreach

MSD Benefit Estimates

MSD Employer Relations

MSD Health Insurance/LTD Benefits Administration and Communication

FSD Service Purchase Processing

FSD Monthly Pension Payroll Processing


3


Impact Comments


FSD New Retiree Processing

FSD Survivor Benefit Processing

FSD Records Management (data processing/imaging)

FSD Mailroom and Printing

FSD LTD/Health Benefit Supplement Processing

FSD Transfer Processing

FSD General Accounting

General Accounting has decreased in staff by 3 FTEs over the last several months due to resignations. The team is working extra hours and projects are taking longer to complete. Negative impact will remain until the vacant positions have been filled.

FSD Contribution Collections and Posting

TSD Network Support

Evaluation of NIS staffing allocation is under review. One new FTE started in January 2018. Recruitment for one position is underway and a recruitment for two additional roles will start February 2018. Negative impact will remain until the vacant positions have been filled.


4


Impact Comments


TSD Business Applications Development and Support

Two FTE positions became vacant in January 2018, Software Engineer and System Architect. An external resource, automation tester, started late January 2018 and recruitment for a Software Engineer will start in February 2018.

IMD Investment Management

DIR Board/Executive Staff Support

DIR Information Security

Four FTE positions are vacant. Security team objectives are being met using external resources until recruitment and hiring are complete.

DIR Strategic Planning/Analysis

DIR Strategic Communications

DIR Public Affairs

DIR Rule Writing

DIR Legislative Relations

DIR Defined Contributions Plans

IA Internal Audit


5


Impact Comments


ASD Human Resources

ASD Training and Development

ASD Contracts and Procurement

ASD Facilities Management

ASD Budget Administration

ASRS Out of State Travel Expenditures Paid Out Fourth Quarter 2017 *Numbers are Unaudited

Date Purpose Location Attendee Cost

Oct. 2-5, 2017 Site Visits, Due Diligence & Jen Annual Mtg. Philadelphia & NY Karl Polen $1,671.05 Oct. 2-5, 2017 Site Visits, Due Diligence & Jen Annual Mtg. Philadelphia & NY Eric Glass $1,533.13 Oct. 14-18, 2017 NPEA Annual Conference Nashville, TN Julie Lockwood $1,566.31 Oct. 14-18, 2017 NPEA Annual Conference Nashville, TN Brandi Clemens $1,593.48 Oct. 15-18, 2017 Q Group Fall 2017 Seminar Vancouver, BC Karl Polen $1,346.77 Oct. 16-17, 2017 Avenue Europe Annual Meeting and AQR New York, NY John Doran $278.64

Oct. 18-20, 2017 Public Pension HR Or. Roundtable Denver, CO Jana George $1,191.45 Oct. 22-26, 2017 P2F2 Conference Albuquerque, NM Erin Higbee $1,508.59 Oct. 22-26, 2017 P2F2 Conference Albuquerque, NM Hong Mayhew $1,368.26 Oct. 23-24, 2017 P2F2 Conference Albuquerque, NM Dave King $474.48 Oct. 25-27, 2017 H/2, L3, CIM & related annual Mtg. New York, NY Micheal Copeland $1,675.99 Oct. 27, 2017 Clear Water Due Diligence Santa Monica, CA Eric Glass $390.66

Nov. 1-5, 2017 Annual Meetings - USAA and Ventas Miami and Orlando, FL Eric Glass $565.88

Nov. 1-5, 2017 Annual Meetings - USAA and Ventas Miami and Orlando, FL Micheal Copeland $618.38

Nov. 14-16, 2017 Monroe Capital LPAC Meeting and Annual Conference Chicago, IL Al Alaimo $98.78

Nov. 14-20, 2017 Public Pensions Funds Conference & Due Diligence New York, NY Paul Matson $1,571.14

Nov. 14-16, 2017 Sharpshooter' Strategy Washington, DC Micheal Copland $1,277.23 Dec. 4-5, 2017 EMG Annual Meeting Houston, TX Eric Glass $244.34 Dec. 6-7, 2017 Due Diligence / Wells Fargo Leadership Forum New York, NY Al Alaimo $1,075.92 Total: $20,050.48

*Final amounts may vary due to adjustments in per diem and reimbursements.

Agenda Item #7d

Director’s Report Cash Flow Statement

ARIZONA STATE RETIREMENT SYSTEMCOMBINED STATEMENT OF CHANGES IN TOTAL FUND CASHFOR THE MONTH ENDED JANUARY 31, 2018

Fiscal FiscalRetirement Retirement Health Benefit Long-Term 2018 2017

Plan System Supplement Disability Current Period YTD YTDFund Fund Fund Fund January January January

ADDITIONSContributions

Member contributions 87,838,137$ 538$ -$ 1,239,901$ 89,078,576$ 616,372,858$ 606,502,162$ Employer contributions 83,600,492 538 3,408,238 1,239,902 88,249,169 613,246,501 606,685,658 Alternative contributions (ACR) 2,174,144 - 23,516 30,518 2,228,179 15,501,944 15,063,404 Transfers from other plans 41,938 - - - 41,938 638,284 90,486 Purchased service 1,892,332 - - - 1,892,332 12,627,158 11,439,931

TOTAL CONTRIBUTIONS 175,547,043 1,075 3,431,753 2,510,322 181,490,193 1,258,386,746 1,239,781,643

DEDUCTIONS* Investment management fees 5,526,934 - - - 5,526,934 34,032,441 35,116,940 Custody fees - - - - - - - Consultant and legal fees 725,739 - - - 725,739 2,660,009 2,941,629 Internal investment activity expense 327,259 - - - 327,259 1,938,324 1,568,606 Retirement and disability benefits 244,565,881 3,062,154 7,995,729 5,083,721 260,707,485 1,839,792,882 1,777,735,482 Survivor benefits 2,879,147 49,523 - - 2,928,670 27,836,371 23,999,173 Refunds to withdrawing members, including interest 21,009,618 - - - 21,009,618 150,058,304 145,159,148 Administrative expenses 2,677,609 - - 3,450 2,681,059 17,449,781 18,407,192 Transfers to other plans 2,458 - - - 2,458 302,302 165,972 Other - - - - - 69,818 214 TOTAL DEDUCTIONS 277,714,645 3,111,677 7,995,729 5,087,171 293,909,222 2,074,140,232 2,005,094,355

INCREASE (DECREASE) (102,167,602) (3,110,602) (4,563,976) (2,576,849) (112,419,028) (815,753,486) (765,312,712)

From securities lending activities:Security loan program 450,306 - - - 450,306 2,907,774 2,647,222 Security loan interest expense / (Rebate) 81,173 - - - 81,173 303,338 (522,784)

** Net income from securities lending activities 369,134 - - - 369,134 2,604,436 3,170,006

*** Capital Calls / (Distributions)Farmland and Timber (1,313,922) (9,879) (57,471) (6,672) (1,387,944) (1,387,944) (2,108,343) Infrastructure - - - - - (16,711,807) - Opportunistic Debt 48,373,583 352,347 2,115,151 235,637 51,076,717 189,083,609 97,675,582 Opportunistic Equity (1,072,611) (7,698) (46,887) (5,362) (1,132,557) (17,097,611) 9,162,274 Private Debt 117,677,000 859,779 5,149,067 572,840 124,258,686 479,408,505 135,902,010 Private Equity 26,843,239 196,501 1,173,418 131,856 28,345,014 (46,500,692) (98,924,502) Real Estate (10,405,285) (76,042) (454,814) (50,476) (10,986,617) 73,023,498 (246,377,122) Owned Real Estate - - - - - 551,369 314,340

TOTAL Capital Calls 180,102,004 1,315,008 7,878,464 877,823 190,173,298 660,368,927 (104,355,762)

NET INCREASE (DECREASE) (281,900,472)$ (4,425,610)$ (12,442,440)$ (3,454,671)$ (302,223,193)$ (1,473,517,977)$ (657,786,944)$

* Investment management fees for public investment managers and other managers paid by invoice. Does not include management fees paid through capital calls.

** Securities lending activities reported on a one month lag.

*** Capital calls / (Distributions) include investment management, incentive and other fees that were paid through capital call, rather than payment of an invoice, or through a reduction of a distribution.

ARIZONA STATE RETIREMENT SYSTEMCOMBINED STATEMENT OF CHANGES IN TOTAL FUND CASHFOR THE MONTH ENDED DECEMBER 31, 2017


Plan System Supplement Disability Current Period YTD YTDFund Fund Fund Fund December December December



TOTAL CONTRIBUTIONS 198,676,651 1,601 3,859,415 2,815,854 205,353,521 1,076,896,553 1,068,811,357

DEDUCTIONS* Investment management fees 1,088,357 - - - 1,088,357 28,505,507 26,474,687 Custody fees - - - - - - (41) Consultant and legal fees 311,526 - - - 311,526 1,602,958 2,527,812 Internal investment activity expense 124,416 - - - 124,416 1,608,117 1,337,484 Retirement and disability benefits 245,175,131 7,118,282 7,937,023 5,160,111 265,390,547 1,579,771,115 1,525,858,572 Survivor benefits 4,687,585 16,731 - - 4,704,316 24,933,469 19,625,138 Refunds to withdrawing members, including interest 17,320,299 - - - 17,320,299 129,031,955 126,496,805 Administrative expenses 1,731,004 - - 133,278 1,864,282 14,549,071 16,121,942 Transfers to other plans 12,173 - - - 12,173 299,843 151,142 Other - - - - - 72,429 99 TOTAL DEDUCTIONS 270,450,491 7,135,013 7,937,023 5,293,389 290,815,916 1,780,374,463 1,718,593,640




*** Capital Calls / (Distributions)Farmland and Timber - - - - - - (2,108,343) Infrastructure (210,445) (1,582) (9,202) (1,053) (222,283) (16,711,807) - Opportunistic Debt (14,384,920) (104,778) (628,985) (70,072) (15,188,755) 138,006,892 77,611,524 Opportunistic Equity (30,253,948) (217,133) (1,322,481) (151,241) (31,944,803) (15,965,053) (56,778,400) Private Debt (74,901,101) (544,264) (3,272,529) (362,057) (79,079,950) 355,149,819 225,980,337 Private Equity (18,320,302) (134,662) (800,866) (89,848) (19,345,678) (74,845,706) (90,970,121) Real Estate (28,962,433) (211,962) (1,265,965) (140,624) (30,580,985) 84,010,116 (266,872,999) Owned Real Estate 601,687 4,734 26,522 3,057 636,000 551,369 314,340

TOTAL Capital Calls (166,431,463) (1,209,648) (7,273,507) (811,837) (175,726,454) 470,195,629 (112,823,663)

NET INCREASE (DECREASE) 95,042,590$ (5,923,765)$ 3,195,898$ (1,665,698)$ 90,649,026$ (1,171,438,237)$ (534,182,756)$




ARIZONA STATE RETIREMENT SYSTEMCOMBINED STATEMENT OF CHANGES IN TOTAL FUND CASHFOR THE MONTH ENDED NOVEMBER 30, 2017


Plan System Supplement Disability Current Period YTD YTDFund Fund Fund Fund November November November



TOTAL CONTRIBUTIONS 181,606,612 1,067 3,528,132 2,581,620 187,717,431 871,614,243 865,322,262

DEDUCTIONS* Investment management fees 11,780,147 - - - 11,780,147 27,417,150 24,804,900 Custody fees - - - - - - (41) Consultant and legal fees 417,277 - - - 417,277 1,290,107 1,421,314 Internal investment activity expense 23,080 - - - 23,080 1,210,937 1,166,237 Retirement and disability benefits 245,774,659 3,123,740 8,172,764 5,383,376 262,454,539 1,316,817,126 1,269,623,545 Survivor benefits 3,598,323 503 - - 3,598,826 20,229,152 16,362,941 Refunds to withdrawing members, including interest 17,495,842 - - - 17,495,842 111,899,489 108,831,704 Administrative expenses 2,184,315 - - 131,487 2,315,802 12,718,028 13,885,724 Transfers to other plans 64,192 - - - 64,192 287,670 151,583 Other - - - - - 72,420 81 TOTAL DEDUCTIONS 281,337,836 3,124,243 8,172,764 5,514,863 298,149,706 1,491,942,081 1,436,247,988




*** Capital Calls / (Distributions)Farmland and Timber - - - - - - - Infrastructure - - - - - (16,489,524) - Opportunistic Debt 4,150,473 31,083 181,530 20,566 4,383,652 153,195,647 92,786,796 Opportunistic Equity 27,744,649 199,124 1,212,793 138,697 29,295,263 15,979,750 (14,234,804) Private Debt 80,477,188 598,737 3,507,673 390,551 84,974,149 434,229,770 210,266,767 Private Equity (10,770,825) (80,634) (470,918) (53,092) (11,375,470) (55,500,029) (60,378,495) Real Estate 101,239,645 755,178 4,425,923 492,995 106,913,742 114,591,100 (308,232,022) Owned Real Estate - - - - - (84,631) (272,560)

TOTAL Capital Calls 202,841,130 1,503,488 8,857,001 989,717 214,191,336 645,922,083 (80,064,319)

NET INCREASE (DECREASE) (302,248,561)$ (4,626,664)$ (13,501,633)$ (3,922,960)$ (324,299,818)$ (1,264,399,585)$ (488,435,418)$




Agenda Item #7e

Director’s Report Appeals

OUTSTANDING ASRS APPEALS

Information as of February 9, 2018. Updates are noted in bold font.

Date Received Appeals Issues/Questions Regarding Status/Comments

12/17/2014 The Griffin Foundation

Appellant is appealing the ASRS determination that the Appellant owes contributions from October 2010 to present for its employees.

ASRS Board accepted the ALJ Decision on 12/4/2015 upholding ASRS agency action. Appellant Griffin Foundation filed an appeal to Maricopa County Superior Court on 1/11/2016. Superior Court ruled in ASRS' favor on 12/19/2016. Griffin Foundation filed an appeal to the Arizona Court of Appeals on 1/18/17. Briefing completed.

10/26/2016 Susan Lagerman Appellant is requesting a retroactive retirement date.

OAH hearing held on 1/5/2017. ALJ decision received on 2/13/2017 upholding ASRS decision. ASRS Appeals Committee accepted ALJ Decision on 3/31/2017. Appellant filed appeal with Superior Court 4/3/2017. Superior Court ruled in ASRS' favor on 11/28/2017. Appellant Susan Lagerman filed an appeal to the Arizona Court of Appeals on 12/8/17. Appellant’s Opening Brief due March 19, 2018.

5/26/2017 Thomas Sylvester

Appellant is requesting deceased wife/ASRS member’s annuity option be changed from Straight Life Annuity to Joint and Survivor 100%.

OAH hearing held on 9/8/2017. ALJ decision received on 10/5/2017 upholding ASRS decision. ASRS Board Appeals Committee accepted the ALJ Decision on 12/12/2017 upholding the agency action.

7/14/2017 Wayne Senner Appellant is requesting reimbursement of child support withheld for June – August 2016.

OAH hearing held on 9/7/2017. ALJ decision received on 10/17/2017 upholding ASRS decision. ASRS Board Appeals Committee accepted the ALJ Decision on 12/12/2017 upholding the agency action. Wayne Senner filed a separate action in Superior Court in January 2018 which the AG Liability Management Section is defending.

9/15/2017 Susan Thompson Appellant is appealing denial of LTD medical eligibility.

OAH hearing rescheduled for 3/5/2018 following approval of appellant’s motion for continuance. Hearing will likely be rescheduled to new date in April or May 2018 per recent order.

OUTSTANDING ASRS APPEALS

Information as of February 9, 2018. Updates are noted in bold font.

11/9/2017 William Arnold Appellant is appealing for a retroactive rescind to Straight Life Annuity to November 2012.

OAH hearing held on 1/4/2018. ALJ decision received on 1/23/2018 upholding ASRS decision. Scheduled to be heard at 4/10/2018 ASRS Board Appeals Committee meeting.

12/28/2017 Marc Skocypec Appellant is requesting old service purchase calculation methodology.

Written waiver of 60-day timeframe received from Appellant - OAH hearing in process of being requested.

Agenda Item #7f

Director’s Report Employers Reporting




Director

MEMORANDUM TO: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director

DATE: February 12, 2018 RE: Delinquent Employers As of February 12, 2018, the following employers have failed to remit contributions by a date certain. These employers have received a letter advising them that the ASRS will initiate collection procedures unless they contact us within five days:

FRANKLIN PHONETIC PRIMARY SCHOOL 18,100 * VALLEY ACADEMY 42,000 * TELESIS CENTER FOR LEARNING 46,000 * PEACH SPRINGS USD #8 7,600 * WHITE MT SUMER HOME WATER IMPROVEMENT DIST 950 * SEQUOIA PATHWAY ACADEMY+ 56,800

PARK VIEW MIDDLE SCHOOL 14,800 * BLACKWATER COMM SCHOOL (3-4) 4,400 * AMERICAN HERITAGE ACADEMY+ 27,700

SEQUOIA CHOICE SCHOOL+ 42,500 CHEVELON BUTTE ELEMENTARY 1,880 * SEQUOIA VILLAGE SCHOOL+ 32,000

SEQUOIA CHARTER SCHOOL+ 120,500 PATHFINDER ACADEMY+ 41,800

SEQUOIA RANCH SCHOOL+ 18,500 SEQUOIA SCHOOL FOR THE DEAF AND HARD OF HEARING+ 29,400 REDWOOD ELEMENTARY ACADEMY+ 14,000 AZ CONSERVATORY FOR ARTS & ACADEMICS+ 41,100 $560,030 * GRAND CANYON PREP 216,000++ LUZ ACADEMY 18,600+++ STARSHINE ACADEMY 67,500+++ $302,100 Total $862,130 *

*Estimated amount +These schools are run by Edkey Inc. ++School Charter has been surrendered and they are delinquent in their ASRS contributions +++ Schools have filed for Chapter 11 Bankruptcy Protection and are delinquent in their ASRS Contributions

Agenda Items #8-11

Note: There are no materials for these

agenda items.

Agenda Item #12




Director

MEMORANDUM TO: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board

FROM: Mr. Paul Matson, Director DATE: February 14, 2018 RE: Agenda Item #12: Presentation, Discussion, and Appropriate Action Regarding the

Board Governance Evaluations a) Trustees’ 2017 Self-Evaluation b) Board 2017 Self-Evaluation c) Key Issues of 2017 d) Focus areas for 2018

The Board Governance Policy Handbooks states: “The Board will conduct an annual performance evaluation of its effectiveness and that of it committees as the governing fiduciary body of the ASRS. This will serve as a means of helping ensure that the Board continues to effectively meet its responsibilities and duties.”

Additionally, the Handbook states “The Board will seek input from the Director with respect to the staff’s perception regarding the Board’s and Board Committees’ performance.”

To assist you with your evaluation, the following documents are included in this packet: 1. Selections from the Handbook:

a. Board Performance Evaluation Outline b. Trustee Self-Evaluation Document c. Overall Board Evaluation Document

2. Trustee Evaluation Input Summary 3. Director’s Comments on 2017 Board Operations

M. BOARD PERFORMANCE EVALUATION General

The Board will conduct an annual performance evaluation of its effectiveness and that of its committees as the governing fiduciary body for the ASRS. This will serve as a means of helping ensure that the Board continues to effectively meet its responsibilities and duties.

Board Evaluation Policy 1. The Board Chair, working with the Director, will be responsible for coordinating and conducting the Board

performance evaluation process. 2. The evaluation will focus on the operations and decision-making processes of the Board as well as the

outcome of ASRS actions. 3. The Board Chair will provide to each Trustee the performance evaluation forms approved by the Board. The

Trustees are to conduct their evaluation in the first quarter of each calendar year, preceding the Director’s evaluation.

4. The Board will seek input from the Director with respect to the staffs’ perception regarding the Board’s and Board Committees’ performance.

5. The Board may seek input from the Assistant Attorney General regarding an annual evaluation of the Board’s compliance with statutory and governance responsibilities.

Board Performance Evaluation Process and Forms A way for the Board to maintain excellence in governance is to develop a policy of reviewing its own performance on an annual basis. A two-step evaluation process has been adopted:

Part A: Trustee Self-Evaluation The purpose of having each individual Trustee evaluate him/herself is to encourage introspection and heighten awareness of the important areas of fiduciary responsibility. Trusteeship carries with it both a personal and collective duty to the members and beneficiaries. The “Trustee Self-evaluation” is an abbreviated outline and periodic reminder of what constitutes “good trusteeship.”

It is recommended that this self-evaluation be performed annually, by each individual Trustee before the overall board evaluation is performed. Each year the Board can choose how to handle the results of the evaluations. The Trustee Self-evaluation is for the personal use of each Trustee to facilitate the full and frank examination of each Trustee’s own performance. The form need not be completed or submitted, but rather each Trustee is asked to review the questions as they contemplate their self-evaluation. The objective is for this annual exercise to be helpful to the ASRS and not embarrassing to any individual.

Part B: Overall Board Evaluation By discussing and developing an overall board evaluation, the Board demonstrates its intention to establish a process for Trustees to evaluate Board performance with candor, objectivity, and a broad perspective. Such an evaluation process presents special challenges, and it may be difficult for Trustees to speak frankly about the performance of the Board as a whole, especially in situations where there is room for improvement. Notwithstanding this difficulty, the benefits of an annual evaluation will enhance the Board’s effectiveness in carrying out the mission of the ASRS.

The “Overall Board Evaluation” form contains elements of “best practices” of public retirement systems and is for the personal use of each Trustee to facilitate the full and frank discussion among the Trustees. The completed form is to be submitted to the Board Chair who will compile the results for further discussion.

Appendix A – Trustee Self Evaluation It is not necessary to turn this document in; it is to assist board members in contemplating their evaluation. Review the following statements in relation to your involvement as a Trustee of the ASRS. Rank answers using the following scale: 5 - always, 4 - almost always, 3 - sometimes, 2 - almost never, 1 - never

5 4 3 2 1

1. I attend the Board and Committee meetings I am expected to attend.

2. I contribute to the discussion in a meaningful and helpful way.

3. I fully understand my fiduciary duties and act for the benefit of all members, not merely for a particular constituency.

4. I make an effort to be educated on the aspects of the ASRS that I do not understand.

5. I comply with state laws and Board policies regarding conflicts of interest.

6. I read the materials distributed before the Board meeting so I can constructively participate and make timely decisions.

7. I work with the other Trustees and the staff in a collegial way.

8. I understand that work requests to staff and outside consultants need to be agreed to by the Board or the Director and I act accordingly.

9. I work with the Director in a way that creates an atmosphere of trust and cooperation.

10. I understand the Director works for the entire Board and not for individual Trustees and I act accordingly.

11. I communicate Board governance problems to the Board Chair. 12. As a Trustee of the Board, I have re-read Section L “Board Code

of Ethics” and Appendix F “Loyalty Oath,” of the Board Governance Policy Handbook and I reaffirm my understanding of these items.

I am most concerned about the following issues:

Appendix B – Overall Board Evaluation

Name (optional) Date: This document should be completed and submitted to the Board chair.

Rate the following statements in relation to the overall operation of the Board. Rank answers using the following scale: 5 - always, 4 - almost always, 3 - sometimes, 2 - almost never, 1 - never

5 4 3 2 1 1. The Board maintains an effective oversight role with regard to benefits

and investments issues.

2. The Board knows and understands the ASRS Strategic Plan, and reflects this understanding when addressing key issues throughout the year.

3. The Board engages in long-range strategic thinking and planning. 4. The Board has achieved the business objectives it set out to accomplish

this past year.

5. The Board stays abreast of issues and trends affecting the ASRS, using this information to assess and guide the ASRS over the long term.

6. The Board conducts a comprehensive evaluation of the Director annually.

7. The Board ensures that new Trustees receive a prompt, thorough orientation.

8. Board meetings are conducted in a manner that ensures open communication, meaningful participation, and sound resolution of issues.

9. The Board meeting agendas are well-balanced, allowing time for the most critical issues.

10. The Board and Committee meetings are handled efficiently. 11. The Committees are effective, focusing on pertinent topics and

allocating reasonable time.

12. The Board is well-educated on both benefit and investment issues. 13. The Board recognizes its policy-making role and reconsiders and

revises policies as necessary.

14. The Board is consistently prepared for meetings. 15. The Board as a whole, and Trustees as individuals, evaluate their

performance on an annual basis.

16. The Board reviews and adopts a reasonable operating budget that is followed and monitored throughout the year.

17. The Board periodically monitors investment performance and measures it against relevant benchmarks.

18. The Board periodically monitors service to members. 19. The Board comprehends and respects the difference between its

policy-making role and the Director’s management role.

20. Board goals, expectations, and concerns are promptly, candidly and effectively communicated to the Director.

21. The Board anticipates issues and does not often find itself reacting to “crisis” situations.

Identify the three greatest achievements of the Agency with Board support during the past year.

1.

2.

3.

What critical issues need to be addressed by the Board in the future?

What suggestions do you have for improvement of the conduct of Board and Committee meetings and for Board

operation and communication?

5 4 3 2 1 Avg.1. The Board maintains an effective oversight role with regard to benefits and

investments issues. 5 5.0

2. The Board knows and understands the ASRS Strategic Plan, and reflects this understanding when addressing key issues throughout the year. 5 5.0

3. The Board engages in long-range strategic thinking and planning.3 2 4.6

4. The Board has achieved the business objectives it set out to accomplish this past year. 3 1 4.8

5. The Board stays abreast of issues and trends affecting the ASRS, using this information to assess and guide the ASRS over the long term. 4 1 4.8

6. The Board conducts a comprehensive evaluation of the Director annually.3 5.0

7. The Board ensures that new Trustees receive a prompt, thorough orientation. 5 5.0

8. Board meetings are conducted in a manner that ensures open communication, meaningful participation, and sound resolution of issues. 5 5.0

9. The Board meeting agendas are well-balanced, allowing time for the most critical issues. 3 1 4.8

10. The Board and Committee meetings are handled efficiently.3 2 4.6

11. The Committees are effective, focusing on pertinent topics and allocating reasonable time. 3 2 4.6

12. The Board is well-educated on both benefit and investment issues.3 2 4.6

13. The Board recognizes its policy-making role and reconsiders and revises policies as necessary. 4 1 4.8

14. The Board is consistently prepared for meetings.4 1 4.8

15. The Board as a whole, and Trustees as individuals, evaluate their performance on an annual basis. 4 5.0

16. The Board reviews and adopts a reasonable operating budget that is followed and monitored throughout the year. 5 5.0

17. The Board periodically monitors investment performance and measures it against relevant benchmarks. 5 5.0

18. The Board periodically monitors service to members.4 5.0

19. The Board comprehends and respects the difference between its policy-making role and the Director’s management role. 3 1 4.8

20. Board goals, expectations, and concerns are promptly, candidly and effectively communicated to the Director. 4 5.0

21. The Board anticipates issues and does not often find itself reacting to “crisis” situations. 4 1 4.8

*Note: Ratings not adding up to 5 responses is due to questions left blank on evaluation forms

5 - always, 4 - almost always, 3 - sometimes, 2 - almost never, 1 - never

Trustee Evaluation Input Summary 2017

Trustee Evaluation Input Summary Comments

Identify the three greatest achievements of the Agency with Board support during the past year.

1. Revised returns moving forward (lower)

2. Diligently and precisely monitored the ASRS portfolio (IC) Better Board understanding of

actuarial/investment assumptions for decision making.

3. Eliminated manager-active investments

4. Revising the forecast and plan for contributions and returns to return system

5. Thorough review of Actuarial Assumptions

6. Better process for hearing appeals

7. Better presentation of investment strategy and performance

8. Just continuation of the excellent communication

9. Board vacancies principally filled

10. Actuarial funding assumptions changed

11. Appropriately changed frequency & content of meetings. Appeals dealt with by

committee

What critical issues need to be addressed by the Board in the future?

• Based on a longer expansion period following the “great recession”, I think prepatarion and planning for ways to prosper in our next recession might be a good use of some time and energy.

• More Frequent review of Actuarial Assumptions

• Continued focus on IT security

• Need a Board member with investment expertise

What suggestions do you have for improvement of the conduct of Board and Committee meetings and for Board operation and communication?

• No, I’m quite impressed with professional environment.

• As I have not served a full year, my learning curve is still rising and I see information as being communicated in a positive and continuous manner.

DIRECTOR’S COMMENTS ON CALENDAR 2017 BOARD OPERATIONS It has been a professional pleasure to have served the ASRS Board and our members during 2017. Following are the Director’s comments/opinions on 2017 Board operations as required pursuant to the ASRS Board Governance Policy Handbook. In addition, perspectives looking forward to 2018 have been included. Key Characteristics Macro Orientation: The Board again substantially focused on macro and strategic level issues.

• This strategic focus is critical to the long-term economic viability of ASRS programs and should be an ongoing focus of the agency.

Oversight: The Board again substantially focused on oversight versus management, and supported a well-defined Governance Model.

• This focus on oversight is important with respect to empowering staff to make significant, complex and/or controversial decisions. The Board appears to be committed and informed, thereby providing the requisite oversight and support.

Cordiality: The Board conducted public and personal dialogue in a cordial and professional manner.

• This is important in ensuring an engaging, open, and supportive forum for Trustees, staff, consultants, members, and members of the public, thereby ensuring that information flows effectively.

• The Board appears respected by Board members, staff, members, the public, and the legislative and executive branches. The Director continues to receive multiple external positive comments on the professionalism of the ASRS.

Support: The Board generally verbalized support, where appropriate, to one another, staff, and consultants on key initiatives.

• This significantly encourages decision-making and action throughout the organization.

Expertise: There was effective utilization of Trustee expertise.

• The focused utilization of Trustees’ specific skills and expertise is often beneficial to the Board, staff and the Trust Fund. This was most evident in the areas of: Operations, Technology, Member Services, Legislative Initiatives, and Budget. A balance between Trustee value-added input versus management appears to exist.

Characteristics for Improvement Although strong finance, budget, private sector, and technical skills exist, an additional investment expert on the Board could be advantageous for oversight purposes.

DIRECTOR’S COMMENTS ON 2017 BOARD OPERATIONS FEBRUARY 14, 2018 Page 2 of 2

Director Recommended Agency Focus Areas for 2018 1. Sustainability of Programs ASRS has allocated significant resources on pro-forma analysis on plan design, liability, funded status, and contribution rate issues. The financial impacts and enhanced credibility that have resulted from this effort have been significant. Although the significant majority of required modifications have been achieved, continued efforts should be maintained in this area. Plan design areas for 2018 focus are: Finalize and implement a health insurance Retrospective Rate Agreement (RRA) distribution

method and policy.

Legislation to effectively control against liability transfer for potential departing employers.

Legislation to reduce any remaining salary spiking issues.

Rule adoption to clarify LTD requirements. 2. Further Enhancements to Operational Effectiveness Possibly modify the mandate of internal audit to be more risk based and consultative.

Select new Chief Internal Auditor.

Further increase productivity through the use of staff engagement and lean analysis.

Further decrease budget size and staff size.

Continue to modernize technology and business processes to simplify a member’s experience.

Energize consistent and outstanding employer and employer customer service.

3. Efficient Investment Processes, Structure, and Strategies

Consider an enhanced asset allocation structure.

Continue to source, diligize, structure, and implement value-added investment strategies.

Research, analyze, and implement value-added tactical asset allocation decisions.

Continue to enhance internal portfolio excess return generation capability.

Enhance and integrate risk-management and tactical portfolio positioning.

Enhance best execution analysis and transaction implementation.

4. Risk Management Enhance the skills, staffing, and processes to mitigate risks, with a focus on digital data, cash, and investment security. 5. Dissemination of Data, Information and Knowledge Dissemination of factual data, information, and knowledge to policy-makers, members, the public, and other interested parties should be a continued agency focus.

Documents

How ASRS employees deliver service with · THE ARIZONA STATE RETIREMENT SYSTEM BOARD 3300 North Central Avenue, 10th Floor Board Room Phoenix, AZ 85012 February 23, 2018 8:30 a.m