ORTH ENTRAL VENUE OX HOENIX HONE AST ROADWAY …wishes to speak to a particular agenda item, they...

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

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

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

December 1, 2017 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, December 1, 2017, 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 October 27, 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

REVISED

http://www.azasrs.gov/

Board Meeting Agenda December 1, 2017 of 4 4. Presentation, Discussion, and Appropriate Action Regarding the ASRS Investment

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

Director ....................................................................................................................... Mr. Karl Polen

Chief Investment Officer 5. Presentation, Discussion, and Appropriate Action Regarding the ASRS’ Comprehensive

Annual Financial Report (CAFR) for Fiscal Year 2017 (estimated time 20 minutes) ....................................................................................................... Mr. Jason Ostroski, CPA

Audit Manager, CliftonLarsonAllen

6. Presentation, Discussion, and Appropriate Action Regarding the ASRS Valuations (estimated time 60 minutes) a. The Pension Plan and Health Insurance Valuation b. The System Valuation c. The Long Term Disability (LTD) Valuation d. Actuary’s Recommendation Regarding 13th Checks for Retired System Members e. The Alternate Contribution Rate (ACR) .................................................................................................................... Mr. Paul Matson ....................................................................................................................... Mr. Ryan Falls

Actuary, Gabriel, Roeder, Smith & Company ...................................................................................................................... Mr. Paul Wood Consultant, Gabriel, Roeder, Smith & Company

7. Presentation, Discussion, and Appropriate Action Regarding Delegating LTD Appeals to the ASRS Board Appeals Committee (AC) (estimated time 5 minutes) ........ Mr. Paul Matson

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

Deputy Director and Chief Operations Officer

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

Board Meeting Agenda December 1, 2017 of 4 9. Presentation, Discussion, and Appropriate Action Regarding Board Self Evaluation Material

Distribution (estimated time 5 minutes) ................................................... Mr. Kevin McCarthy

10. 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 January 3, 2018.

b. Investment Committee (IC) ........................................... Mr. Clark Partridge, Acting Chair ................................................................................................................. Mr. Karl Polen The next IC Meeting is scheduled for December 15, 2017.

c. Appeals Committee (AC) ..............................................................Mr. Tom Manos, Chair ....................................................................................................... Mr. Anthony Guarino The next AC Meeting is scheduled for December 12, 2017.

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

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

13. The next regular public ASRS Board meeting is scheduled for Friday, February 23, 2018, at 8:30 a.m., at 3300 N. Central Avenue, in the 10th Floor Board Room, Phoenix, Arizona.

14. 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.

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

Board Meeting Agenda December 1, 2017 of 4 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 November 28, 2017 ARIZONA STATE RETIREMENT SYSTEM Signed Copy on File Signed Copy on File Alicia Guzman Paul Matson Board Administrator Director

Agenda Item #2


ARIZONA STATE RETIREMENT SYSTEM


TOLL FREE OUTSIDE METRO PHOENIX AND TUCSON 1 (800) 621-3778

MINUTES PUBLIC MEETING

ARIZONA STATE RETIREMENT SYSTEM BOARD

Friday, October 27, 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 8:31 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. Tom Manos, Vice-chair

Mr. Clark Partridge Mr. Jim Hillyard (Joined the meeting at 8:34 a.m.) Mr. Michael Lofton Mr. Michael Miller

Absent: Mr. Rene Guillen Two vacant positions. A quorum was present for the purpose of conducting business. 2. Approval of the Minutes of the August 25, 2017 Public Meeting of the ASRS Board. Motion: Mr. Michael Miller moved to approve the minutes of the August 25, 2017 Public Meeting of the ASRS Board. Mr. Kevin McCarthy seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved. Mr. Jim Hillyard joined the meeting at 8:34 a.m. 3. Presentation, Discussion, and Appropriate Action Regarding ASRS Legislative

Initiatives and Legislative Update

ASRS Board Meeting October 27, 2017 Page 2 of 8

Ms. Jessica Thomas, Government Relations Officer, introduced the topic by stating that during the summer of this year the ASRS received legislative suggestions from ASRS staff, third party administrators, and Trustees concerning federal statutory requirements, plan inefficiencies/inconsistencies/inequities, administrative concerns and others. Staff first presented the legislative package at the October 4, 2017 Operations, Audit, and Legislative Committee (OALC). The OALC moved to recommend to the full Board approval of the legislative initiatives at its October 27, 2017 meeting. Ms. Thomas identified changes made to 38-751. Mr. Matson made a request to Ms. Thomas to provide updated language to the statutes.

Ms. Thomas reviewed each of the legislative initiatives for the 2019 Legislative Session as follows:

1. Amend A.R.S. § 38-718 to exempt all investment related services from the procurementcode

a. Allows the ASRS to contract for investment related services outside of theProcurement Code

b. Allows the ASRS to contract for investment related services much more simplyand quickly which is necessary in a dynamic industry

c. Allows the ASRS to contract for more expert services such as due diligence onad hoc investments

d. Allows the ASRS to contract with necessary companies and individuals such aslarge investment firms and industry experts that might otherwise be unavailable

2. Amend A.R.S. § 38-701(6) to allow the Governor’s Office to name any state agency asthe state social security administration

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

Administrator dutiesd. Free up more ASRS staff resources for administering the Plan

3. Amend A.R.S. § 38-751 to include information about how the Non-ParticipatingEmployer Liability is calculated and charged and to whom it is assessed

a. Allows the ASRS to determine whether an Employer is no longer participatingb. Allows the ASRS to calculate an unfunded liability for an Employerc. Allows the ASRS to manage asset fund accounts established for the unfunded

liability of Employers

Ms. Thomas provided an update on statute 38-751 noting that subsection (D) has been amended to clarify that non-participating employer’s separate account would be adjusted for all other benefits paid out to the employer’s members, beneficiaries, and survivors. Additionally a new subsection (I) has been added to the draft statute to clarify that once an employer was considered no longer participating under the statute, they can no longer begin to participate at a future date.


4. Amend A.R.S. § 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

Ms. Thomas answered questions from the Board regarding 38-718 exemptions on 214 and 511 stating she will be meeting with Arizona Department of Administration (ADOA) and the procurement department next week to clarify questions and concerns regarding these exemptions. Mr. Matson made a request to Ms. Thomas to provide him, the Board Chair, and any other Board member who may request, a final draft of the modified language after she meets with ADOA. Mr. Matson advised the Board that this is the first time the ASRS moves on any legislation with respect to the Deferred Compensation Board (38-871) within the last 15 years. He also stated that the reason the ASRS is carrying this legislation is the 457 Board doesn’t have direct staff. They currently have a vendor they work with, which is not in position to run legislation. Motion: Mr. Tom Manos moved to approve the proposed 2018 Legislative Agenda. 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. 4. Presentation, Discussion, and Appropriate Action Regarding the ASRS 2018

Regulatory Agenda and Update on ASRS Rulemaking Initiatives

Ms. Jessica Thomas provided an update regarding the outstanding rulemaking activities on the 2016 Regulatory Agenda, which includes the Long Term Disability (LTD) Program and the Overpayments Program. Additionally, Ms. Thomas provided an update on the remaining activities on the 2017 Regulatory Agenda, which include an amendment to the definition of “Board” with regard to hearing appeals, and the Compensation rulemaking. Ms. Thomas noted an update to the 2017 Rulemaking Update provided to the Board, which includes a delayed effective date on the Compensation rulemaking and the Termination Incentive Programs in order to provide employers and members notice that these rules were going to be in effect. Additionally, Ms. Thomas noted that the ASRS has determined to postpone the Lump sum threshold rulemaking and the Definition of “termination of employment” rulemaking until 2018 due to Oracle Modernization of Service Purchase and the anticipated rulemaking regarding R2-1-126: Calculating Optional Forms of Benefits. Further, Ms. Thomas provided an overview of the proposed rulemaking on the 2018 Regulatory Agenda. Motion: Mr. Tom Manos moved to approve the proposed 2018 Regulatory Agenda. Mr. Michael Miller seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved.


The record should reflect the response of Mr. Michael Lofton, who was attending via teleconference, was momentarily delayed and he has confirmed that his vote was in favor of the motion and is reflected in the above results.

5. Presentation, Discussion, and Appropriate Action Regarding the ASRS Investment Program Updates

Mr. Karl Polen, Chief Investment Officer provided an update of the ASRS investment Program. He presented the current fund positioning noting the over and under-weights of each asset class. He then provided a review of the IMD Investment House Views. Further, he provided an overview of the IMD projects and Asset Class Committee Activities. Additionally, Mr. Polen provided an update of the MSCI Risk Report. Mr. Polen concluded his report by answering questions from the Board regarding the performance of the Farming portfolio. 6. Presentation, Discussion, and Appropriate Action Regarding Independent Reporting

Monitoring, and Oversight of the ASRS Investment Program Mr. Allan Martin, Partner, NEPC, provided a review of Total Fund performance and an independent assessment of the ASRS investment program. He noted that for the one-year period ending June 30, 2017, the Total Fund returned 13.9% (net of fees), underperforming the Interim Strategic Asset Allocation (SAA) Policy by 0.1%. For the three-year period, the Total Fund produced a return of 5.7% per annum, outperforming the Interim (SAA) Policy by 0.9%. Further, he noted that over the past ten years, the Total Fund has returned 5.6% per annum, and since inception, the portfolio’s performance is 9.7%. Mr. Martin noted that these results place the ASRS in the top quartile of public fund performance for all of the one, three, five and ten year reporting periods. Mr. Martin also provided a summary of investment performance by asset class. He noted that the outperformance of the total fund was supported by positive results across the asset classes. Notably, the private markets program has materially contributed to both absolute and relative returns, especially from the private debt, opportunistic equity and real estate programs. In public markets, Mr. Martin described the consistent outperformance of the fixed income program, noting however, underperformance in active management in public equities, which is being addressed by changes in that program. 7. Presentation, Discussion, and Appropriate Action Regarding the ASRS Experience

Study Presentation Mr. Ryan Falls, Actuary, Gabriel, Roeder, Smith and Company (GRS) and Mr. Joe Newton, Senior Consultant, GRS, provided a summary of the primary purpose of the annual actuarial valuation and Experience Study. They provided a presentation that includes recommendations to the ASRS for new actuarial assumptions and methods to be effective for the June 30, 2019 actuarial valuation. Mr. Falls described the actuarial impact produced by these recommendations as though they had been effective for the June 30, 2016 actuarial valuation. The recommendations include: Economic Assumptions, Mortality Assumptions, Demographic Assumptions, Actuarial Methods and Policies, and Assumptions Specific to the Long Term Disability Program.

ASRS Board Meeting October 27, 2017 Page 5 of 8 Mr. Falls and Mr. Newton answered questions from the Board members regarding contribution rate, salary increases, Payroll Growth Assumption (PGA), and the relative impact of PGA. Further, Mr. Newton answered questions with regards to the details of the components of the 2.5% growth assumption in the funding policy. A discussion took place with regards to the declining population growth and the impact on the rate. Mr. Kevin McCarthy requested data regarding population growth rate within the past five years for Teachers K-12. Mr. Matson will provide the information to Mr. McCarthy when it’s ready. Motion: Mr. Tom Manos moved to approve adoption of the experience study and recommendations, and the resulting changes in methods and assumptions, as presented by GRS, and to specifically: Reduce the investment return assumption from 8% to 7.5% Pre-fund possible future Permanent Benefit Increases Utilize a generational ASRS specific mortality table with improvement scales Move from the Projected Unit Credit method to the Entry Age Normal method Utilize level percentage of pay amortization

and to apply these changes with a 5-year phase in to the pension plan, the health insurance premium benefit program, and the long term disability program, and to modify the ASRS Funding Policy to reflect the pre-funding of possible future Permanent Benefit Increases (PBI). 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. 8. Presentation, Discussion, and Appropriate Action Regarding ASRS Retiree Health

Insurance Including: a. Goals b. Health Insurance, Cost Allocation and Pricing Options; and c. Retrospective Rate Agreement and Distribution (RRA) Methodology Options

Mr. Paul Matson, Director, presented the ASRS Health Insurance Program including the following:

a) Goals b) Health Insurance Cost Allocation and Pricing Options c) Retrospective Rate Agreement and Distribution Methodology Options d) Strategic Health Insurance Policies

Mr. Matson reviewed the Health Insurance Premium Setting Policy and recommended two changes as follows:

1. A minor mechanical change regarding the parameters that will apply in order to utilize the Integrated Case Underwriting (ICU). The two limits that are listed under Roman numeral I and II will become a continuation (condition 3 and condition 4) of the list of conditions that will apply in order to utilize the ICU.


2. Insert “including the maximum ASRS Health Insurance premium benefit” to condition 1 and condition 2 after ‘premium level’.

The updated list of conditions that must exist in order to utilize the ICU approach after Mr. Matson’s recommended changes is as follows:

1. The monthly single rate premium level including the max of one or more in-state plans is equal to or greater than 20% of the Mean Average Annuity (MAA).

2. The monthly single rate premium including the maximum ASRS Health Insurance

premium benefit differences between in-state plans is equal to or greater than 10% of the MAA.

3. The expected increase in the premiums for any Plan will not exceed 15% compared to

the premiums with no ICU for the same respective Plan.

4. The expected decrease in the premiums of any Plan will not exceed 20% compared to the premiums with no ICU for the same respective Plan.

Further, Mr. Matson reviewed the Strategic RRA Management and Distribution Policy to which he made a recommendation; to change “U.S. Gov’t/Credit Float Adjusted: 1-5 Year” on the second page under Investment Benchmark to be referenced as “Intermediate Government Credit One Index” Motion: Mr. Jim Hillyard moved to approve the:

1. Health Insurance Goals 2. Strategic Health Insurance Premium Setting Policy; and the amendments Mr. Matson

suggested. 3. Strategic Health Insurance RRA Management and Distribution Policy

Mr. Michael Miller seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved. 9. Presentation, Discussion, and Appropriate Action Regarding the FY2019 Budget Mr. Paul Matson reviewed the background of the August 25, 2017 Board motion regarding the ASRS appropriated budget, continuously appropriated budget and administrative and investment spending plans for fiscal year (FY) 2019. He explained this motion is being recommended to clarify the understanding and the intent of the appropriated and continuously appropriated spending plans. Motion: Mr. Jim Hillyard moved to replace the August 25th Board motion pertaining to the ASRS budget, by approving an appropriated budget request for FY 2019 in the amount of $24,642,700 with an understanding there may ultimately be changes to the total appropriated budget amount due to legislative and executive recommendations, and to also accept the proposed continuously appropriated administrative and investment spending plans for FY 2019 subject to revised management projections, and to include private markets performance incentives and other fees when identified and paid. Mr. Tom Manos seconded the motion.

ASRS Board Meeting October 27, 2017 Page 7 of 8 By a vote of 6 in favor, 0 opposed, 0 abstentions, 1 excused, and 2 vacancies, the motion was approved. The record should reflect the response of Mr. Michael Lofton, who was attending via teleconference, was momentarily delayed and he has confirmed that his vote was in favor of the motion and is reflected in the above results. 10. Presentation and Discussion, Regarding a Change in the Operations, Audit, and

Legislative Committee (OALC) Membership Make-up Mr. McCarthy announced that due to the departure of one Board member who also served on the (OALC), he reduced the OALC from four to three members, with the current three members; chairmanship and vice-chairmanship remaining the same. 11. Presentation, Discussion, and Appropriate Action Regarding the 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. 12. 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 4, 2017.

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. Tom Manos announced the next AC meeting is scheduled to be held on November 14, 2017

13. Board Requests for Future Agenda Items No requests were made. 14. Call to the Public A member of the public, Mr. Joe Geusic, requested to address the Board.

ASRS Board Meeting October 27, 2017 Page 8 of 8 Mr. Geusic introduced himself stating he’s an advocate of the entire K-12 education system. Mr. Geusic thanked Mr. Matson for the time to meet with him to share some thoughts and knowledge regarding where we are and where we’re going. Mr. Geusic made general comments with regard to contribution rates that have risen over the years and the impact on members of the K-12 system. Mr. Geusic referenced a consolidated report from Joint Legislative Board Commission (JLBC) and provided copies for the Board Chair and the ASRS Director, and asked that they review it to ensure it is accurate. 15. The next regular ASRS Board meeting is scheduled for Friday, December 1, 2017 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, December 1, 2017 at 8:30 a.m. 16. Adjournment of the ASRS Board Motion: Mr. Tom Manos moved to adjourn the October 27, 2017, Board Meeting at 10:20 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





MEMORANDUM

TO: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director Ms. Jessica Thomas, Government Relations Officer DATE: November 17, 2017 RE: Agenda Item #3: Presentation, Discussion and Appropriate Action Regarding the

ASRS 2018 Legislative Initiatives and Legislative Update. Purpose To discuss the proposed ASRS initiatives for the 2018 legislative session. Recommendation Information item only; no action is necessary. Background At its October 27, 2017 meeting, the ASRS Board approved the 2018 ASRS Legislative Initiatives that were recommended by the OALC during its October 4, 2017 meeting. The Board approved four initiatives. Attachments: 2018 Legislative Agenda A.R.S. § 38-718 Redlined Version (Updated post October 27 Board meeting) A.R.S. § 38-751 Redlined Version (Updated post October 27 Board meeting) A.R.S. § 38-701 Redlined Version A.R.S. § 38-871 Redlined Version


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.

DRAFT DRAFT DRAFT

38-718. Investment managers; general powers and duties; investment of monies; limitations

A. A financial institution serving as an investment manager does not have a conflict of interest because it is also a depository in which ASRS monies are deposited.

B. The board shall appoint and may remove multiple investment managers to invest and reinvest the assets of ASRS. The board may authorize the director to retain and manage staff to make investments as an investment manager.

C. An investment manager shall be qualified to make the type of investments for which the investment manager is appointed.

D. The board shall:

1. Prescribe investment goals and policies that are consistent with the purposes of this article and the limitations and standard of care prescribed in this section.

2. Allocate assets and use investment strategies to meet the investment goals and policies ASRS prescribes.

3. Adopt specific directives for the guidance of investment managers.

4. Review the performance of each investment manager at least annually or at the request of a board member.

5. Prescribe investment diversification programs and assign investment manager responsibilities regarding those programs as it deems appropriate to achieve its investment goals, objectives and policies.

E. An investment manager shall discharge the duties of the position with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with the same matters would use in the conduct of an enterprise of a like character and with like aims as that of ASRS.

F. An investment manager may invest and reinvest in the name of ASRS all ASRS monies assigned to the investment manager and shall purchase and sell in the name of ASRS any of the securities and investments held by ASRS under this article. An investment manager may hold, purchase, sell, assign, loan, borrow, transfer and dispose of any of the securities and investments in which any of its account monies are invested, subject to the specific directives determined by ASRS. An investment manager shall redeposit the proceeds of sales, maturities and calls in the ASRS depository.

G. The director may enter into security loan agreements with one or more security lending entities.

H. No more than eighty per cent of ASRS assets may be invested at any given time in equities, measured at market value.

I. No more than forty per cent of ASRS assets may be invested in non-United States public investments, measured at market value.

DRAFT DRAFT DRAFT

J. No more than sixty per cent of ASRS assets may be invested internally, measured at market value.

K. No more than five per cent of ASRS assets may be invested in securities issued by any one institution, agency or corporation, other than securities issued as direct obligations of or fully guaranteed by the United States government or mortgage backed securities and agency debentures issued by federal agencies, measured at market value.

L. No more than ten per cent of ASRS assets may be invested in bonds or other evidences of indebtedness of those multinational development banks in which the United States is a member nation, including the international bank for reconstruction and development, the African development bank, the Asian development bank and the inter-American development bank, measured at market value.

M. If a limitation in subsection H, I, J, K or L of this section is reached, ASRS is not required to sell assets, but shall not make any further investments of that type until the limit is no longer exceeded.

N. Notwithstanding any other law, an investment manager is not required to invest in any type of investment that is intended to fund economic development projects, public works or social programs but may consider such economically targeted investments pursuant to its fiduciary responsibility.

O. THE BOARD MAY ENTER INTO CONTRACTS UTILIZED DIRECTLY FOR INVESTMENT RELATED SERVICES FOR For the purpose of exercising the investment responsibilities prescribed in this sectionARTICLE AND ARTICLE 2.1, the board may enter into contracts to receive market data and other market information from securities, commodities, options and monetary exchanges. These contracts may be interpreted and enforced under the laws of a jurisdiction other than this state and are not subject to section 35-214 or 38-511 or title 41, chapter 23.

P. Proprietary commercial information that is provided to the board, director, investment manager, employees of the director and attorneys of the board or the director relating to investments in which an investment manager has invested or has considered for investment is confidential and not a public record if the information is information that customarily would not be released to the public by the person or entity from whom the information was obtained.

DRAFT DRAFT DRAFT 1 38-751. Nonparticipating employer liability allocation; 2 definitions 3 A. ASRS shall allocate a liability to ESTABLISH A SEPARATE FUND FOR 4 an employer OTHER THAN THIS STATE OR A CHARTER SCHOOL that is: 5 1. No longer participating in ASRS if that nonparticipation is 6 based on AS A RESULT OF any of the following:

7 1. (a) The character of the employer changes from a public entity 8 to a private entity. 9 2. b An employer, other than this state or a charter school, 10 files for bankruptcy or otherwise dissolves. 11 3. An employer is no longer participating. 12 c(B) AN EMPLOYER DISSOLVES. 13 d(C) THROUGH LEGISLATIVE ACTION, THE EMPLOYER IS NO LONGER ENROLLING 14 NEW EMPLOYEES IN ASRS OR NO LONGER CONTRIBUTING TO ASRS ON BEHALF OF 15 CURRENT EMPLOYEES OR GROUPS OF EMPLOYEES WHO OTHERWISE WOULD BE ELIGIBLE 16 FOR ASRS MEMBERSHIP. 17 4. For this state, the character of a state agency, board or 18 commission changes from public to private. 19 B. ASRS shall determine the schedule and method of payment of the 20 allocated liability. 21 C. The liability allocated to an employer under this section is 22 equal to the sum of the following: 23 1. The plan employer actuarial accrued liability multiplied by the 24 plan total deficit percentage. 25 2. The LTD program employer actuarial accrued liability multiplied 26 by the LTD program total deficit percentage. 27 2. BASED ON THE NUMBER OF CONTRIBUTING EMPLOYEES AS OF THE EFFECTIVE

DATE OF THIS AMENDMENT TO THIS SECTION: 28 (A) CONSIDERED TO EMPLOY A MINIMUM OF FIFTY EMPLOYEES AS OF ONE YEAR

PRECEDING THE EMPLOYER’S NONPARTICIPATION DATE; AND 29 (B) IS NO LONGER PARTICIPATING IN ASRS AS A RESULT OF REDUCING THE

NUMBER OF ACTIVELY CONTRIBUTING EMPLOYEES BY THIRTY PERCENT OR MORE OVER A THREE-YEAR PERIOD OR BY FIFTY PERCENT OR MORE OVER ANY PERIOD OF TIME BY FILLING A POSITION ORDINARILIY FILLED BY AN EMPLOYEE OF THE EMPLOYER WITH AN EMPLOYEE WHO IS NOT OTHERWISE ACTIVELY CONTRIBUTING, UNLESS THE EMPLOYEE PARTICIPATES IN ANOTHER ARIZONA RETIREMENT PLAN LISTED IN TITLE 38, CHAPTER 5, ARTICLES 3, 4, OR 6, OR AN OPTIONAL RETIREMENT PLAN LISTED IN TITLE 15, CHAPTER 12, ARTICLE 3 OR TITLE 15, CHAPTER 13, ARTICLE 2.

30 B. FOR A NONPARTICIPATING EMPLOYER DESCRIBED IN SUBSECTION A OF 31 THIS SECTION, ASRS SHALL ALLOCATE AN ACTUARIAL ACCRUED LIABILITY AND A 32 DESIGNATED ASSET AMOUNT TO THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND 33 AS OF THE NONPARTICIPATION DATE, WHICH SHALL BE CALCULATED AS FOLLOWS:

- 1 -

DRAFT DRAFT DRAFT

1 1. THE ACTUARIAL ACCRUED LIABILITY SHALL EQUAL THE SUM OF THE PLAN 2 EMPLOYER ACTUARIAL ACCRUED LIABILITY AND THE LTD PROGRAM EMPLOYER 3 ACTUARIAL ACCRUED LIABILITY. ACTUARIAL ACCRUED LIABILITY SHALL BE 4 CALCULATED BASED ON THE SAME ACTUARIAL ASSUMPTIONS AND METHODS AS THE 5 ACTUARIAL VALUATION PERFORMED IMMEDIATELY PRECEDING THE NONPARTICIPATING 6 EMPLOYER'S NONPARTICIPATION DATE. 7 2. THE DESIGNATED ASSET AMOUNT SHALL EQUAL THE SUM OF THE 8 FOLLOWING: 9 (a) THE PLAN EMPLOYER ACTUARIAL ACCRUED LIABILITY MULTIPLIED BY THE

10 PLAN FUNDED PERCENTAGE. 11 (b) THE LTD PROGRAM EMPLOYER ACTUARIAL ACCRUED LIABILITY MULTIPLIED 12 BY THE LTD PROGRAM FUNDED PERCENTAGE. 13 C. ALL MONIES AND SECURITIES TRANSFERRED TO THE NONPARTICIPATING 14 EMPLOYER'S SEPARATE FUND SHALL BE CREDITED TO THAT FUND. A RECORD OF THE 15 MARKET VALUE AND THE COST VALUE OF SUCH TRANSFERRED CONTRIBUTIONS SHALL BE 16 MAINTAINED FOR ACTUARIAL AND INVESTMENT PURPOSES. ASRS SHALL MAKE ALL 17 DECISIONS REGARDING THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND. 18 D. AFTER ESTABLISHING THE NONPARTICIPATING EMPLOYER'S SEPARATE 19 FUND, THE FUND SHALL BE ADJUSTED FOR ALL OF THE FOLLOWING: 20 1. ALL CONTRIBUTIONS MADE BY EMPLOYEES OF THE NONPARTICIPATING 21 EMPLOYER. 22 2. ALL CONTRIBUTIONS MADE BY THE NONPARTICIPATING EMPLOYER. 23 3. ALL PLAN, LTD PROGRAM, AND ANY OTHER BENEFITS PAID TO THE

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

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

25 5. THE APPLICABLE SHARE OF THE INVESTMENT GAINS AND LOSSES. 26 6. EXPENSES ASSOCIATED WITH THE ADMINISTRATION OF THE 27 NONPARTICIPATING EMPLOYER'S SEPARATE FUND, INCLUDING ANY ADMINISTRATIVE, 28 DEVELOPMENT, ACTUARIAL, LEGAL, CUSTODIAL AND INVESTMENT MANAGEMENT COSTS 29 ASSOCIATED WITH THE FUND. THESE EXPENSES SHALL BE PAID DIRECTLY BY THE 30 NONPARTICIPATING EMPLOYER OR INCLUDED IN THE EMPLOYER'S LIABILITY FOR THE 31 PURPOSES OF DETERMINING THE EMPLOYER'S CONTRIBUTION RATE. 32 E. AFTER ESTABLISHING THE NONPARTICIPATING EMPLOYER'S SEPARATE 33 FUND, THE NONPARTICIPATING EMPLOYER AND ANY EMPLOYEES OF THAT EMPLOYER WHO 34 ARE ENROLLED IN ASRS SHALL CONTINUE TO HAVE CONTRIBUTION REQUIREMENTS TO 35 THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND. THE CONTRIBUTION 36 REQUIREMENTS SHALL BE CALCULATED AS FOLLOWS: 37 1. ALL EMPLOYEES OF THE NONPARTICIPATING EMPLOYER WHO ARE ENROLLED 38 IN ASRS SHALL CONTINUE TO MAKE CONTRIBUTIONS THROUGH PAYROLL DEDUCTIONS 39 BASED ON THE CONTRIBUTION RATE DETERMINED FOR THE EMPLOYEES OF 40 PARTICIPATING EMPLOYERS OF ASRS PURSUANT TO SECTION 38-736. 41 2. THE N O N P A R T I C I P A T I N G E M P L O Y E R S H A L L

C O N T I N U E T O M A K E C O N T I R B U T I O N S T H R O U G H 42 LUMP SUM PAYMENTS IN ACCORDANCE WITH SECTION 38-735, EQUAL TO THE SUM OF: 43 (a) CONTRIBUTIONS OWED THROUGH PAYROLL DEDUCTIONS BASED ON THE

CONTRIBUTION RATE DETERMINED FOR PARTICIPATING EMPLOYERS PURSUANT TO SECTION 38-737.

- 2 -

DRAFT DRAFT DRAFT

1 (b) THE AMOUNT REQUIRED TO AMORTIZE THE PAST SERVICE FUNDING 2 REQUIREMENT IN THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND OVER A PERIOD 3 THAT IS DETERMINED BY THE BOARD AND CONSISTENT WITH GENERALLY ACCEPTED 4 ACTUARIAL STANDARDS. IN DETERMINING THE PAST SERVICE FUNDING PERIOD, THE 5 BOARD SHALL SEEK TO IMPROVE THE FUNDED STATUS WHENEVER THE 6 NONPARTICIPATING EMPLOYER'S SEPARATE FUND IS LESS THAN ONE HUNDRED PERCENT 7 FUNDED. 8 F. THE ASRS ACTUARY SHALL DETERMINE THE ACTUARIAL ASSUMPTIONS USED 9 TO DETERMINE THE CONTRIBUTION REQUIREMENTS FOR THE NONPARTICIPATING

10 EMPLOYER UNDER SUBSECTION E OF THIS SECTION. NOTWITHSTANDING SECTION 11 38-737, THE CONTRIBUTION FOR THE NONPARTICIPATING EMPLOYER SHALL NOT BE 12 DETERMINED AS A PERCENTAGE OF COMPENSATION DUE TO THE ANTICIPATED DECLINE 13 OF COMPENSATION FOR EMPLOYEES OF THE NONPARTICIPATING EMPLOYER 14 PARTICIPATING IN ASRS. THE NONPARTICIPATING EMPLOYER SHALL CERTIFY ON 15 EACH PAYROLL THE AMOUNT TO BE CONTRIBUTED AND SHALL REMIT THAT AMOUNT TO 16 ASRS AT A RATE CONSISTENT WITH THE RATE PAID BY THE PARTICIPATING 17 EMPLOYERS. EACH FISCAL YEAR, AMOUNTS THAT ARE NOT REMITTED THROUGH 18 PAYROLL CONTRIBUTIONS PURSUANT TO THIS SECTION SHALL BE INVOICED TO THE 19 EMPLOYER AND SHALL BE PAID WITHIN THE SAME FISCAL YEAR THE 20 NONPARTICIPATING EMPLOYER IS INVOICED. 21 D. G. This section does not permit an employer to alter the 22 irrevocable agreement approved by the board under section 38-729. 23 H. FOR THE PURPOSES OF CALCULATING AN EMPLOYER'S LIABILITY UNDER 24 THIS SECTION, MEMBERS WHO ARE ACTIVE, INACTIVE, RETIRED OR ON LONG-TERM 25 DISABILITY ARE CONSIDERED EMPLOYEES OF THE NONPARTICIPATING EMPLOYER IF 26 THE MEMBER'S MOST RECENT EMPLOYER WAS THE NONPARTICIPATING EMPLOYER AS OF 27 THE NONPARTICIPATION DATE. 1 I. AN EMPLOYER THAT IS NO LONGER PARTICIPATING PURSUANT TO THIS

SECTION IS NOT ELIGIBLE TO PARTICIPATE IN THE ASRS AFTER THE EMPLOYER’S NONPARTICIPATION DATE.

28 E. J. For the purposes of this section: 29 1. "LTD program" means the program established by article 2.1 of 30 this chapter. 31 2. "LTD program employer actuarial accrued liability" means the 32 value of all of the employer's open LTD program claims as of the 33 nonparticipation date plus the value of any LTD program claims that 34 employees of the employer file within twenty-four months after the 35 nonparticipation date and that are approved by ASRS. ACTUARIAL ACCRUED 36 LIABILITY FOR THE EMPLOYER'S ACTIVE AND INACTIVE MEMBERS AND THE OPEN LTD 37 PROGRAM CLAIMS FOR THE EMPLOYEES OF THE EMPLOYER AS OF THE 38 NONPARTICIPATION DATE. 39 3. "LTD program total deficit FUNDED percentage" means the total 40 LTD program actuarial accrued liabilities minus the total market value of 41 MARKET VALUE OF LTD program assets divided by the total LTD program 42 actuarial accrued liabilities, as of the actuarial valuation performed 43 immediately preceding the nonparticipation date. If the percentage is 44 less GREATER than zero ONE HUNDRED PERCENT, the LTD program total deficit 45 FUNDED percentage is zero ONE HUNDRED PERCENT.

- 3 -

DRAFT DRAFT DRAFT

1 4. "Nonparticipation date" means the date on which the employer is

2 no longer participating in ASRS. 3 5. "Plan" means the retirement plan established by this article. 4 6. "Plan employer actuarial accrued liability" means the

plan's 5 actuarial accrued liability for all benefits provided under this

article, 6 including benefits established in section 38-783, for the

employer's 7 active, inactive or retired members as of the actuarial

valuation 8 performed immediately preceding the nonparticipation date. 9 7. "Plan total deficit FUNDED percentage" means the

plan's 10 TOTAL MARKET VALUE OF ASSETS DIVIDED BY THE PLAN’S actuarial accrued

liability for all benefits provided under this article, 11 including benefits established in section 38-783, for all active,

inactive 12 or retired members minus the market value of total plan assets divided

by 13 the plan's actuarial accrued liability for all benefits provided

under 14 this article, including benefits established in section 38-783, for

all 15 active, inactive or retired members as of the actuarial

valuation 16 performed immediately preceding the nonparticipation date. If

the 17 percentage is less GREATER than zero ONE HUNDRED PERCENT, the

plan total 18 deficit FUNDED percentage is zero ONE HUNDRED PERCENT.

DRAFT DRAFT DRAFT

38-701. Definitions

In this article, unless the context otherwise requires:

1. "Commissioner of social security" includes any individual to whom the commissioner of social security has delegated any of the commissioner's functions under the social security act with respect to coverage under the act of employees of states and their political subdivisions.

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

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

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

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

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

DRAFT DRAFT DRAFT

38-871. Annuity and deferred DEFERRRED compensation governing committee; members; powers and duties

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

1. Three MEMBERS employees of the state appointed by the governor. FROM ANY OF THE FOLLOWING CATEGORIES:

A. INDIVIDUALS WHO HAVE AN ACCOUNT BALANCE IN A PLAN WHICH IS OVERSEEN BY THE GOVERNING COMMITTEE. SUCH INDIVIDUALS MAY BE CONTRIBUTING OR NON-CONTRIBUTING PARTICIPANTS IN A PLAN, AND MAY BE NON-RETIRED OR RETIRED.

B. MEMBERS OF THE PUBLIC WHO ARE NOT PLAN PARTICIPANTS AND HAVE AT LEAST TEN YEARS OF RELEVANT EXPERIENCE IN EITHER FINANCE, INVESTMENT MANAGEMENT, PENSION PLANS, OR RETIREMENT PLANS.

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

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

4. The director of insurance or the director's designee.

5. The director of the Arizona state retirement system or the director's designee.

B. GOVERNING COMMITTEE MEMBERS ARE SUBJECT TO APPLICABLE STATE CONFLICT OF INTEREST LAWS GOVERNING PUBLIC OFFICERS.

B.C. The governing committee may:

1. Investigate and approve tax deferred compensation and annuity programs PLANS which give STATE employees of the state income tax benefits authorized by title 26, United States Code Annotated.

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

3. ADOPT RULES.

C.D. The governing committee shall:

1. Arrange for consolidated billing and efficient administrative services in order that any such plans approved shall operate without cost or contribution from the state except for the incidental expense EXPENSES of STATUTORILY REQUIRED ADMINISTRATIVE DUTIES AND THE ADMINISTRATION OF administering the payroll salary deduction or reduction and remittance thereof to the ADMINISTRATOR, trustee or custodian of the plan or plans.

DRAFT DRAFT DRAFT

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

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

4. Adopt rules governing the solicitation of employees by persons offering tax deferred compensation or annuity plans to such employees. ARRANGE FOR A PERFORMANCE REVIEW OF THE PLANS OR PARTICIPATION IN BENCHMARKING SURVEYS OR STUDIES AT LEAST EVERY FIVE YEARS.

38-872. Voluntary participation; authorization

A. State employees may participate in tax deferred annuity and deferred compensation programs plans established pursuant to the provisions of section 38-871.

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

Agenda Item #4

Portfolio PositioningPerformance Summary

Risk ReportIMD Asset Class Commitees

IMD Projects

CIO Report

Arizona State Retirement System

December 1, 2017

Arizona State Retirement System CIO Report 1 / 17



IMD Projects

Fiscal Year Performance




IMD Projects

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




IMD Projects

Return Decomposition

Trailing Returns & Dollar Value Add

0%

5%

10%

One Year Three Year Five Year Ten Year

Ann

ualiz

ed R

etur

n

Total Fund SAA Benchmark

Trailing Period Returns as of 9/30/17

Total Fund & SAA Benchmark

$0

$500

$1,000

$1,500

$2,000


in M

illio

ns

Relative to SAA Benchmark as of 9/30/17

Total Fund Dollar Value Add




IMD Projects


Total Fund Returns

−32%

−24%

−16%

−8%

0%

8%

16%

24%

32%

40%

1980 1990 2000 2010

Ann

ual R

etur

n

Rolling 1 Yr

Rolling 10 Yr

Rolling 20 Yr

1, 10, and 20 Year Rolling Returns




IMD Projects


Attribution Analysis

0%

2%

4%

6%

2008 2010 2012 2014 2016 2018

Cum

ulat

ive

Exc

ess

Ret

urn

(Lin

e)

Attribution

Allocation

Selection

Interaction

Residual

as of 9/30/17Total Fund Brinson Attribution




IMD Projects


Total Fund by Private and Public Markets

Annualized Returnsas of 9/30/17

One Year Three Year Five Year Ten YearTotal Fund 13.95% 7.42% 9.38% 5.84%

SAA Benchmark 13.46% 6.62% 8.49% 5.3%Excess 0.49% 0.8% 0.89% 0.55%

Public_Markets 14.45% 6.8% 8.73% 6.01%Benchmark 14.52% 6.89% 8.74% 5.72%

Excess1 -0.07% -0.09% -0.01% 0.29%Private Markets 12.99% 10.07% 11.95% 10.2%

Benchmark1 12.48% 7.74% 9.75% 8.72%Excess2 0.51% 2.32% 2.2% 1.47% $0

$10

$20

$30

2008 2010 2012 2014 2016 2018

in B

illio

ns

Public Markets Private Markets

as of 9/30/17

Total Fund Quarterly Weights

$0$500

$1,000$1,500$2,000


in M

illio

ns Total FundTotal PublicTotal PrivatesAllocation and Interaction

Relative to SAA Benchmark as of 9/30/17

Total Fund Dollar Value Add




IMD Projects


Public Markets by Asset Class


One Year Three Year Five Year Ten YearPublic Equity 18.94% 8.42% 11.39% 5.76%

Public Equity Benchmark 19.46% 8.75% 11.58% 5.75%Public Equity Excess -0.52% -0.33% -0.2% 0.01%Public Fixed Income 1.73% 3.17% 2.3% 4.71%

Public Fixed Income Benchmark 1.83% 2.69% 2.01% 4.46%Public Fixed Income Excess -0.1% 0.48% 0.29% 0.26%

Other 7.88% -0.82% 2.11% 3.02%Other Benchmark 1.95% -1.21% 1.57% 1.42%

Other Excess 5.93% 0.39% 0.53% 1.6%

$0

$10

$20

2010 2015

in B

illio

ns

Public Equity Public Fixed Income Other

Public Manager Market Values as of 9/30/17

$0

$300

$600

$900


in M

illio

ns Total PublicPublic EquityPublic Fixed IncomeOther

Total Public $ Value Add Relative to Composite Benchmarks




IMD Projects


Public Equities Decomposition


One Year Three Year Five Year Ten YearUS Large Cap.US Large Cap 17.92% 10.72% 14.1% 7.47%

US Large Cap.Benchmark 18.61% 10.81% 14.22% 7.44%US Large Cap.Excess -0.69% -0.09% -0.13% 0.03%

US Mid Cap.US Mid Cap 17.61% 10.91% 14.55% 8.86%US Mid Cap.Benchmark 17.52% 11.18% 14.43% 9%

US Mid Cap.Excess 0.09% -0.26% 0.12% -0.14%US Small Cap.US Small Cap 18.98% 10.81% 14.25% 8.99%

US Small Cap.Benchmark 21.05% 14.07% 15.6% 9.27%US Small Cap.Excess -2.07% -3.26% -1.35% -0.28%

Public Opportunistic.Public Opportunistic -0.15% NA% NA% NA%Public Opportunistic.Benchmark 18.86% NA% NA% NA%

Public Opportunistic.Excess -19.01% NA% NA% NA%non-US Developed.non-US Developed 19.79% 6.13% 8.83% 2.38%

non-US Developed.Benchmark 19.41% 5.75% 9.05% 2.64%non-US Developed.Excess 0.38% 0.38% -0.22% -0.26%

Emerging Markets.Emerging Markets 23.69% 4.37% 4.52% NA%Emerging Markets.Benchmark 22.46% 4.9% 4.06% NA%

Emerging Markets.Excess 1.23% -0.53% 0.46% NA%

$0

$5

$10

$15

$20

2008 2010 2012 2014 2016 2018

in B

illio

ns

US Large CapUS Mid Cap

US Small CapRisk Factors

Public Opportunisticnon−US Developed

Emerging Markets

Public Equity Income Market Values as of 9/30/17

$−200

$−100

$0

$100


in M

illio

ns

US Large CapUS Mid CapUS Small CapRisk FactorsPublic Opportunisticnon−US DevelopedEmerging Markets

Public Equity Value Add Relative to Composite Benchmarks




IMD Projects


Public Fixed Income Decomposition


One Year Three Year Five Year Ten YearInterest Rate Sensitive 0.22% 3.16% 2.36% 4.57%

Benchmark 0.07% 2.72% 2.07% 4.28%Excess 0.15% 0.43% 0.29% 0.29%

High Yield Fixed Income 7.78% 6.15% 6.34% NA%Benchmark1 8.9% 5.84% 6.37% NA%

Excess1 -1.12% 0.31% -0.03% NA%

$0

$2

$4

$6

2010 2015

in B

illio

ns

Interest Rate Sensitive High Yield Fixed Income Emerging Market Debt

Public Fixed Income Market Values as of 9/30/17

$0

$25

$50

$75

$100


in M

illio

ns

Interest Rate SensitiveHigh Yield Fixed IncomeEmerging Market Debt

Public Fixed Income Value Add Relative to Composite Benchmarks




IMD Projects


Public Markets by Active/Passive/Internal


One Year Three Year Five Year Ten YearExternal Active 16% 5.77% 7.49% 5.18%

External Active Benchmark 13.71% 5.83% 7.31% 4.75%External Active Excess 2.29% -0.06% 0.19% 0.43%

Internally Managed 14.22% 9.75% 11.92% 8.07%Internally Managed Benchmark 14.09% 9.69% 11.86% 7.93%

Internally Managed Excess 0.12% 0.06% 0.07% 0.14%External Passive 13.98% 5.07% 7.03% 5.48%

External Passive Benchmark 13.62% 4.66% 6.82% 5.22%External Passive Excess 0.36% 0.41% 0.22% 0.26%

$0

$10

$20

2010 2015

in B

illio

ns

External Active Internally Managed External Passive

Public Manager Market Values as of 9/30/17

$0

$500


in M

illio

ns

Total PublicExternal ActiveInternally ManagedExternal PassiveTransitions

Total Public $ Value Add Relative to Composite Benchmarks




IMD Projects


Private Markets Decomposition

Annualized Returnsas Reported 9/30/17

One Year Three Year Five Year InceptionTotal Private Markets 12.99% 10.07% 11.95% 10.2%

Benchmark 12.48% 7.74% 9.75% 8.72%Excess 0.51% 2.32% 2.2% 1.47%

$0

$4,000

$8,000

$12,000

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 Reported 9/30/17

$−250

$0

$250

$500

$750

$1,000

One Year Three Year Five Year Inception

in M

illio

ns

Total PrivatesPrivate EquityReal Estate.CurrentOpportunistic DebtPrivate DebtFARMReal Estate.Legacy

Private Markets Dollar Value Add Relative to Composite Benchmarks




IMD Projects


Private Markets Composites

Annualized Return

as Reported 9/30/17

One Year Three Year Five Year InceptionPrivate Equity 16.01% 9.89% 12.91% 11.96%PE Benchmark 23% 6.2% 11.69% 11.13%

PE Excess -6.99% 3.69% 1.22% 0.83%Real Estate Current 13.11% 14.32% 16.05% 16.01%

RE Current Benchmark 7.27% 10.55% 10.68% 10.7%RE Current Excess 5.83% 3.78% 5.37% 5.31%Real Estate Legacy -0.52% 8.43% 11.34% 5.92%

RE Legacy Benchmark 7.38% 11.8% 11.6% 6.08%RE Legacy Excess -7.9% -3.37% -0.26% -0.16%

Opportunistic Debt 14.98% 5.12% 7.58% 9.71%Opp Debt Benchmark 10.09% 6.12% 7.17% 9.42%

Opp Debt Excess 4.89% -1% 0.41% 0.3%Private Debt 12.51% 10.53% NA% 11.35%

PD Benchmark 10.02% 6.85% NA% 7.09%PD Excess 2.49% 3.67% NA% 4.25%

Farmland & Infrastructure 8.66% 6.72% NA% 6.46%Farmland Benchmark 5.27% 5.5% NA% 5.5%

Farmland Excess 3.39% 1.22% NA% 0.97%




IMD Projects

Value at Risk

TOTAL PORTFOLIO VALUE‐AT‐RISK (VAR)

7

Annualized Total VaR have declined over the last year. As of September 30, 2017, total VaR for ASRS Portfolio was 13.6%, indicating that there is a 5% chance that portfolio could lose ~$4.7B in a given year. Note that a 5% event is expected to occur every 20 years




IMD Projects

Asset Class Committee Schedule

Date Combined Asset Class Committee Investment Committee

January 17 X

February 17 X

March 17 X

March 23 X

April 27 X

May 30 X

June 14 X

June 30 X

July 31 X

Aug 3 X

Aug 31 X

Oct 31 X

Nov 13 X




IMD Projects

Combined Public and Private Markets Committee SummaryActivities

From August 31, 2017 through November 13, 2017Approved 5 private equity investment investments.

$90M - private equity middle market manager$150M - private equity middle market manager$75M - private equity middle market manager$55M - private equity middle market manager$35M - private equity middle market manager

Approved a private opportunistic co-investment for $30M to an existing

private equity manager.




IMD Projects

IMD Project Status

Equities active management

Multi asset strategy review

Securities lending 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

Legal RFP

Custody RFP

IMD Database

Total fund attribution

Equities trading optimization

Middle office review

2017

−07

2018

−01

2018

−07

2019

−01

Date

Status

done

future

in process

ASRS Investment Management Division Projects


Agenda Item #5





MEMORANDUM

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 Ms. Erin Higbee, Chief Financial Officer

DATE: November 9, 2017 RE: Agenda Item #5: Presentation, Discussion, and Appropriate Action Regarding the

ASRS’ Comprehensive Annual Financial Report (CAFR) for Fiscal Year 2017 Purpose To inform the Board that the ASRS external auditor, CliftonLarsonAllen, LLP, issued 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 as a whole (see page 13 of the Comprehensive Annual Financial Report (CAFR)). Mr. Jason Ostroski, Principal, will speak on behalf of CliftonLarsonAllen, LLP. Recommendation Information item only; no action required. Background An unmodified opinion means the Arizona State Retirement System’s financial statements present fairly, in all material respects, the net position of the funds of the ASRS, a component unit of the State of Arizona, as of June 30, 2017, and the changes in net position of the funds for the year then ended in conformity with generally accepted accounting principles in the United States of America. We anticipate the ASRS will once again receive the Government Finance Officers Association’s Certificate of Achievement for Excellence in Financial Reporting for its June 30, 2017 CAFR. To receive this certificate, the ASRS must publish a CAFR that is easily readable, efficiently organized, and must satisfy both generally accepted accounting principles and applicable legal requirements. In keeping with the state directive to conduct business electronically whenever possible, please note that an e-copy of the CAFR may be found at the following internet address after the external auditor presentation of the CAFR to the Board at the December 1, 2017 Board meeting: https://www.azasrs.gov/content/annual-reports Attachment 1: Independent Auditors’ Report Attachment 2: Independent Auditors’ Report on Internal Controls Attachment 3: Independent Auditors’ Required Communication with Those Charged with Governance


https://www.azasrs.gov/content/annual-reports

CliftonLarsonAllen LLPCLAconnect.com

INDEPENDENT AUDITORS’ REPORT

The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System

Report on the Financial Statements

We have audited the financial statements of the Arizona State Retirement System (ASRS), a component unit of the State of Arizona, which comprise the Combined Statements of Fiduciary Net Position as of June 30, 2017, the related Combined Statements of Changes in Fiduciary Net Position for the year then ended, and the related Notes to the Basic Financial Statements, as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the net position of the ASRS as of June 30, 2017, and the respective changes in its net position for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matters

Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis and the Schedules of Changes in the Net Pension Liability - Retirement, Net Pension Liability - Retirement, Employer Contributions - Retirement, Investment Returns - Retirement, Changes in the Net OPEB Liability - HBS, Net OPEB Liability – HBS, Employer Contributions – HBS,


Investment Returns – HBS, Changes in the Net OPEB Liability – LTD, Net OPEB Liability – LTD, Employer Contributions – LTD, Investment Returns – LTD, and related Notes, as listed in the table of contents, be presented to supplement the financial statements. Such information, although not a part of the financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Other Information Our audit was conducted for the purpose of forming an opinion on the ASRS’ financial statements. The Additional Supplementary Information, as listed in the table of contents, is presented for purposes of additional analysis and is not a required part of the financial statements.

The Additional Supplementary Information, as listed in the table of contents, is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Additional Supplementary Information is fairly stated, in all material respects, in relation to the financial statements as a whole.

The Introductory, Investment, Actuarial, and Statistical sections, as listed in the table of contents, have not been subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we do not express an opinion or provide any assurance on it.

Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 3, 2017 on our consideration of the ASRS’ internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the ASRS’ internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the ASRS’ internal control over financial reporting and compliance.

CliftonLarsonAllen LLP

Baltimore, Maryland November 3, 2017

@ Cl iftonlarsonAllen

CliftonLarsonAllen LL P CLAconnect.com

INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS

BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS


We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Arizona State Retirement System (ASRS), a component unit of the State of Arizona, which comprise the Combined Statements of Fiduciary Net Position as of June 30, 2017, and the related Combined Statements of Changes in Fiduciary Net Position for the year then ended, and the related Notes to the Basic Financial Statements, and have issued our report thereon dated November 3, 2017.

Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the ASRS' internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the ASRS' internal control. Accordingly, we do not express an opinion on the effectiveness of the ASRS' internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

~Ne~i~ ~ International 1


Compliance and Other Matters

As part of obtaining reasonable assurance about whether the ASRS' financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the ASRS' internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering ASRS' internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

Cliftonl arsonAllen LLP


2

~ Cl if ton Larson Allen


CliftonLarsonAllen LL P CLAconnect.com

We have audited the financial statements of the Arizona State Retirement System (ASRS) for the year ended June 30, 2017, and have issued our report thereon dated November 3, 2017. We have previously communicated to you information about our responsibilities under auditing standards generally accepted in the United States of America and Government Auditing Standards, as well as certain information related to the planned scope and timing of our audit. Professional standards also require that we communicate to you the following information related to our audit.

Significant audit findings Qualitative aspects of accounting practices Accounting policies Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the ASRS are described in Note 2 to the financial statements. For the year ended June 30, 2017, the financial statements include the impact of adopting Governmental Accounting Standards Board (GASS) Statement 74.

As described in Note 2, the ASRS adopted GASS Statement 74, Financial Reporting for Postemployment Benefit Plans other than Pension Plans in 2017. The statement establishes standards of financial reporting for separately issued financial reports and specifies the required approach to measuring the OPES (Other Post-Employment Benefits) liability of employers and non-employer contributing entities for benefits provided through the OPES plan (net OPES liability). GASS 74 requires expanded note disclosures.

We noted no transactions entered into by the ASRS during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period.

Accounting estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were for the fair value of certain alternative investments and actuarial information.


We evaluated the key factors and assumptions used to develop the estimate of the fair value of certain alternative investments (real estate, private equity, private debt, farmland , infrastructure and opportunistic funds) in determining that it is reasonable in relation to the financial statements taken as a whole. The estimates are primarily based upon amounts reported by the investment managers and make up 34% of the total investment portfolio. The values for these investments are reported based upon the most recent financial data available and are adjusted for cash flows and other adjustments through June 30, 2017. Our audit procedures validated this approach through the use of confirmations sent directly to a sample of investment managers as well as through the review of recent audited fund financial statements and all adjustments from the audited financial statement date through the ASRS' year-end.

The actuarial valuations were based on the actuarial assumptions and methods adopted by the Board, including an actuarial expected investment rate of return of 8.0% per annum compounded annually. In accordance with GASS 67, the total pension liability of the retirement portion of the defined benefit pension plan was calculated with the most recently available actuarial valuation, dated June 30, 2016, and rolled forward to the measurement date of June 30, 2017. In accordance with GASS 74, the total OPES liability of the health supplement premium portion of the defined benefit pension plan and the LTD (Long-Term Disability) program was calculated with the most recently available actuarial valuation, dated June 30, 2016, and rolled forward to the measurement date of June 30, 2017. We evaluated the key factors and assumptions used to develop the estimate of the total pension and OPES liabilities in determining that it is reasonable in relation to the financial statements taken as a whole.

Financial statement disclosures Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. There were no particularly sensitive financial statement disclosures.

The financial statement disclosures are neutral, consistent, and clear.

Difficulties encountered in performing the audit We encountered no significant difficulties in dealing with management in performing and completing our audit.

Uncorrected misstatements Professional standards require us to accumulate all misstatements identified during the audit, other than those that are clearly trivial , and communicate them to the appropriate level of management. Management did not identify and we did not notify them of any uncorrected financial statement misstatements.

Corrected misstatements There were no misstatements detected as a result of audit procedures and corrected by management that were material, either individually or in the aggregate, to the financial statements taken as a whole.

Disagreements with management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditors' report. No such disagreements arose during our audit.

The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System Page 3

Management representations We have requested certain representations from management that are included in the attached management representation letter dated November 3, 2017.

Management consultations with other independent accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the entity's financial statements or a determination of the type of auditors' opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants.

Significant issues discussed with management prior to engagement We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to engagement as the ASRS' auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our engagement.

Other information in documents containing audited financial statements With respect to the required supplementary information (RSI) accompanying the financial statements, we made certain inquiries of management about the methods of preparing the RSI , including whether the RSI has been measured and presented in accordance with prescribed guidelines, whether the methods of measurement and preparation have been changed from the prior period and the reasons for any such changes, and whether there were any significant assumptions or interpretations underlying the measurement or presentation of the RSI. We compared the RSI for consistency with management's responses to the foregoing inquiries, the basic financial statements, and other knowledge obtained during the audit of the basic financial statements. Because these limited procedures do not provide sufficient evidence, we did not express an opinion or provide any assurance on the RSI.

With respect to the additional supplementary information accompanying the financial statements, on which we were engaged to report in relation to the financial statements as a whole, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period or the reasons for such changes, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the additional supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. We have issued our report thereon dated November 3, 2017.

The introductory, investment, actuarial and statistical sections of the comprehensive annual financial report (the other information) is being included in documents containing the audited financial statements and the auditors' report thereon. Our responsibility for such other information does not extend beyond the financial information identified in our auditors' report. We have no responsibility for determining whether such other information is properly stated and do not have an obligation to perform any procedures to corroborate other information contained in such documents. As required by professional standards, we read the other information in order to identify material inconsistencies between the audited financial statements and the other information. We did not identify any material inconsistencies between the other information and the audited financial statements.

The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System Page4

Our auditors' opinion, the audited financial statements, and the notes to financial statements should only be used in their entirety. Inclusion of the audited financial statements in a document you prepare, such as an annual report, should be done only with our prior approval and review of the document.

* * *

This communication is intended solely for the information and use of the Board of Trustees and management of the Arizona State Retirement System and is not intended to be, and should not be, used by anyone other than these specified parties.

CliftonLarsonAllen LLP


Agenda Item #6



ARIZONA STATE RETIREMENT SYSTEM Paul Matson

Director

MEMORANDUM

TO: Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director DATE: November 28, 2017 RE: Agenda Item #6: Presentation, Discussion and Appropriate Action Regarding ASRS

Valuations Purpose

1. To present the Actuarial Valuations of the Plan, Health Benefit Supplement Program, System, and Long-Term Disability (LTD) Program prepared by the ASRS retained actuary, Gabriel, Roeder, Smith and Company (GRS).

2. To present the funded status and contribution rates of implementing recommendations resulting from the Actuarial Experience Study performed by GRS and presented to the Board at its October 27, 2017 meeting, and to determine the most appropriate implementation.

Recommendation Adopt valuation reports, contribution rates, and the actuarial assumptions for the Plan, Health Insurance, System, LTD, and Alternate Contribution Rate (ACR). Background Each fiscal year the ASRS retained actuary performs a valuation of the plans which have associated liabilities and which are administered by the ASRS, and calculates their funded status and recommended contribution rates. The funded status and contribution rates have also been determined with the inclusion of the recommended changes outlined in the GRS Experience Study Report.

Copyright © 2017 GRS – All rights reserved.

Arizona State

Retirement System

Actuarial Valuations as of June 30, 2017

Ryan Falls, FSA, EA, MAAA

Paul Wood, ASA, MAAA

Agenda

• Introduction to Actuarial Mathematics

• Experience Study Recap

• 2017 Valuation Results – Plan

– Contribution Rates and Liabilities

– Sources of Change

– Projections

• 2017 Valuation Results – System and LTD

2

Actuarial Valuation

• Prepared as of June 30, 2017 using member data, financial data, benefit and contribution provisions, actuarial assumptions and methods as of that date

• Purposes: Measure the actuarial liabilities Determine contribution rates based on funding policy Provide other information for reporting

– CAFR – Accounting results provided under separate report

Explain changes in actuarial condition of ASRS Track changes over time Warn about possible future problems and issues

3

Actuarial Valuation Process

4

Actuarial Assumptions and

Methods

Funding Policy

Covered Member Data

Asset Data

Plan Provisions Actuarial Valuation

Funded Status

Contribution Rates

Accounting Information

4

Actuarial Definitions

• Present Value of Benefits (PVB)

• Normal Cost

• Actuarial Accrued Liability (AAL)

• Unfunded Actuarial Accrued Liability (UAAL)

• Funded Ratio

• Actuarially Determined Contribution (ADC)

• Amortization Period/Policy

5

Actuarial Cost Method

(Entry Age Normal)

$52.2

$1.4

$7.5

Present Value of Benefits

Actuarial Accrued Liability

6

• Present Value of Benefits (PVB) – present value of all future benefits payable to current participants (active, retired, terminated vested)

• Actuarial Accrued Liability (AAL) – portion of PVB allocated to prior years (equal to unfunded actuarial accrued liability plus assets), also represents the target value of assets at a specific point in time based on the funding objectives

• Normal Cost – portion of PVB allocated to current year, also represents cost of accruing next year’s benefit

• Future Normal Costs – portion of

PVB allocated to future years

Normal Cost

Future Normal Costs

$61.1 (Billions)

Actuarial Definitions

$15.4

$1.4

$7.5

$36.8

Present Value of Benefits

Valuation Assets

7

• Unfunded Actuarial Accrued Liability

(UAAL) – shortfall between actuarial

accrued liability (or target value of

assets) and the actual value of assets at

a specific point in time

• Funded Ratio – the actual asset value as

a percentage of the target asset value

Funded ratio for the Plan is 70.5%

Future Normal Costs

$61.1 (Billions)

UAAL

Normal Cost

Why is there a UAAL?

• If contributions have been made equal to the actuarially determined contribution for the life of the fund, why does the UAAL exist?

– New base at inception

– Benefit increases granted that change the accrual for past service

– Past experience differing from expectations

– Changing the prospective assumption for future experience

8

Actuarially Determined Contribution (ADC)

• The contribution is set to be the sum of:

– The normal cost for the year and

– The amortization of the UAAL

• Another way to look at it:

– The contribution for the current year plus

– The contribution to make up any shortfall that may have occurred due to past experience or changing expectations

9

Current ASRS Amortization Policy

• Current funding policy utilizes a process of “laddering” new gains and losses over an individual closed amortization period – 30 years for 401(a)

Gain/Loss from Current Year: 30 years remaining Initial UAAL from 2013: 26 years remaining

– 15 years for 401(h)

• The amortization schedules are based on level percent of pay payments over the amortization period – Expected to remain stable as a percent of pay

• This methodology ensures the Plan will move towards 100% funding over a closed period of time – Current UAAL will be fully funded over the next 30 years if the

contribution schedule is fulfilled and the assumptions are met

10

Current Contributions to UAAL

Before Experience Study Changes

11

Summary of Amortization Bases - 401(a)

Summary of Amortization Bases - 401(h)

Date

Established Purpose Initial Amount

Remaining

Balance as of

June 30, 2017

Remaining

Balance as of

June 30, 2018

Years

Remaining as of

June 30, 2018

2018/2019

Amortization

Payment

6/30/2013 Fresh Start Base 9,801,122,666$ 9,411,259,455$ 9,293,551,641$ 25 806,119,047$

6/30/2014 Experience (Gain)/Loss 86,726,009 84,240,669 83,276,274 26 7,133,008



6/30/2016 Audit Recommendations 13,713,495 14,810,575 12,286,017 4 3,434,633


Total 10,908,824,515$ 10,838,026,627$ 937,591,666$

Date

Established Purpose Initial Amount

Remaining

Balance as of

June 30, 2017

Remaining

Balance as of

June 30, 2018

Years

Remaining as

of June 30, 2018

2018/2019

Amortization

Payment

6/30/2013 Experience (Gain)/Loss 160,224,559$ 133,634,001$ 125,605,758$ 10 17,332,373$

6/30/2014 Experience (Gain)/Loss (51,756,215) (45,568,063) (43,166,853) 11 (5,598,755)




Total 52,205,862$ 46,230,297$ 7,863,120$

Experience Study Recap

• General Findings – Reviewed ASRS-specific experience from June 30, 2011

through June 30, 2016 – Future economic growth likely to continue to be

suppressed compared to historical levels Future investment returns likely to be less than previously

assumed

– Future PBI’s should be reflected in the funding calculations – Retirees continue to live longer, and the expectations for

the rates of future improvement were updated for more recent information

– Most other assumptions were reasonable or only needed minor modifications

12

Experience Study Recap

• Summary of Approved Changes – Discount Rate of 7.50%, inflation rate of 2.30%, and

general wage inflation of 2.50% – Potential for future PBI’s reflected in the funding

calculations at a rate of 0.30% per year – ASRS specific mortality table with generational

improvements – Updated demographic assumptions – Use of Entry Age Normal actuarial cost method – Use of level percent of pay financing – A 5-year phase in of the contribution rate impact

13

2017 Actuarial Valuation –

Key Changes and Issues

• Funded Ratio decreased and the UAL increased as a

result of the experience study

• 2017 investment performance on a market value basis

well above the previous 8.00% expectation

– Approximately 13.6% return on market value of assets

Dollar weighted calculation by GRS, net of administrative expenses

– 6.1% return on actuarial (smoothed) basis

Actual returns smoothed over 10-year period

– Currently $975 million in deferred investment gains

Will be incorporated into contribution rates over the next nine years

14

Estimated Yields Based on Market Value of

Assets

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Market -7.5% -18.3% 14.6% 24.8% 1.1% 13.0% 19.3% 2.5% 0.6% 13.6%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

15

5.61% average compound return (on market value) over last 10 years.

8.00% 5.61%

Market and Actuarial Values of Assets

$36.8

$37.8

$0

$5

$10

$15

$20

$25

$30

$35

$40

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2016

Market Actuarial

$ Billions 401(a) and 401(h) – Combined

16

2017 Plan Valuation Results

17

401(a) and 401(h) – Combined

*Excludes members currently on LTD

2015

Valuation

2016

Valuation

2017

ValuationActive Members 203,252 204,162 206,055

Expected Payroll $9.1 billion $9.3 billion $9.6 billion

Inactive Members 219,346 222,260 228,490

Annuitants* 131,536 136,026 142,117

Annual Benefits $2.7 billion $2.8 billion $2.9 billion

17

2017 Plan Valuation Results

18

401(a) and 401(h) – Combined

2016 Valuation

2017 Valuation

Before Assumption

Changes

2017 Valuation After

Assumption

Changes (Before

Phase In)

UAAL ($ Billions) $10.34 $10.96 $15.38

Actuarial Funded Ratio 77.6% 77.1% 70.5%

Contribution Rate: Employer 11.34% 11.57% 12.97%

Contribution Rate: Employee 11.34% 11.57% 12.97%

Contribution Rate: Total 22.68% 23.14% 25.94%

Amortization Rate as % of Payroll 9.36% 9.68% 10.47%

Normal Cost as a % of Payroll 13.32% 13.46% 15.47%

Total Rate as a % of Payroll 22.68% 23.14% 25.94%

Actuarial Funded Ratio 74.4% 79.1% 72.4%

Based on Smoothed Asset Value

Based on Market Value

18

Change in UAAL Since Prior Valuation

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Normal CostAccruals

Interest Charges Contributions Assets Liabilities Experience Study

+/-

in m

illio

ns

19

Reconciliation of Change in Contribution Rate Before Phase In

20

EE+ER

Contribution

Rate

Change in

Contribution

Rate

Valuation as of June 30, 2016 22.68%

Expected Experience 22.39% -0.29%

Completion of New Entrant Normal Cost Phase-In 22.80% 0.41%

Asset Experience 23.46% 0.66%

Pay Increase Experience 23.42% -0.04%

Non-Retired Demographic Experience 23.26% -0.16%

Post-Retirement Mortality Experience 23.22% -0.04%

Other Experience 23.20% -0.02%

Assumption Changes 25.94% 2.74%

401(a) and 401(h) Combined

Long Term Projections – Before Phase In Contribution Rate, Funded Status, and UAL

21

Projections assume all other assumptions are exactly met

Actuarial

Valuation as

of June 30,

Contribution

Rate Effective

as of July 1,

Member

Contribution

Rate

Funded Status

(Smoothed

Basis)

Unfunded

Accrued

Liability2017 2018 12.97% 70.5% $15,382

2018 2019 13.02% 71.1% 15,542

2019 2020 12.77% 72.1% 15,369

2020 2021 12.67% 73.1% 15,263

2021 2022 12.61% 73.9% 15,167

2022 2023 12.54% 74.8% 15,055

2025 2026 12.35% 77.1% 14,543

2030 2031 12.11% 80.8% 13,250

2035 2036 11.99% 85.4% 10,647

2040 2041 11.87% 92.4% 5,860

2045 2046 7.95% 99.5% 444

2047 2048 6.51% 100.0% 0

401(a) and 401(h) Combined - Before Phase In Strategy

Experience Study Phase In Strategy

• The Board approved a 5-Year Phase In of the

contribution increase attributable to the experience

study changes

• Under this strategy, contribution rates are expected to

increase by approximately 0.30% of payroll each year for

the next five years

– Projected contribution rate of 12.83% in FYE 2023

• Provides for a smooth transition to the higher

contribution rates over a reasonable period of time

22

Long Term Projections – After Phase In Contribution Rates, Funded Status, and UAL

23

Projections assume all other assumptions are exactly met

Actuarial

Valuation as

of June 30,

Contribution

Rate Effective

as of July 1,

Member

Contribution

Rate

Funded Status

(Smoothed

Basis)

Unfunded

Accrued

Liability2017 2018 11.64% 70.5% $15,382

2018 2019 11.94% 71.1% 15,542

2019 2020 12.24% 71.6% 15,640

2020 2021 12.54% 72.1% 15,782

2021 2022 12.83% 72.8% 15,839

2022 2023 12.78% 73.5% 15,806

2025 2026 12.60% 75.9% 15,313

2030 2031 12.36% 79.6% 14,017

2035 2036 12.23% 84.4% 11,362

2040 2041 12.11% 91.6% 6,479

2045 2046 8.18% 98.9% 875

2047 2048 6.51% 100.0% 0

401(a) and 401(h) Combined - After Phase In Strategy

Projected Contribution Rate - 401(a) and 401(h) – Total Rate With 5-Year Phase In Strategy

6.10%

5.70%

4.34%

4.34%

4.00% 4.00%

10.40%

10.40%

13.80%

17.20%

18.20%

17.90%

18.00%

19.20%

21.00%

21.80% 22.60%

22.96%

22.70%

22.68%

22.68%

23.28%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

For FY Ending

History Projected

24

Sensitivity to Investment Returns – Projected Contribution Rate With 5-Year Phase In Strategy

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

For FY Ending

History MVA Projected at 6% MVA Projected at 7.50% MVA Projected at 9%

401(a) and 401(h) – Total Rate

25

Funded Ratio History

401(a) and 401(h) – Total

0%

20%

40%

60%

80%

100%

120%

140%

160%

As of Valuation Date

Funded Ratio on Smoothed Funded Ratio on Market

26

Sensitivity to Investment Returns –

Projected Funded Ratio

50%

55%

60%

65%

70%

75%

80%

85%

90%

As of Valuation Date

Smoothed Assets MVA Projected at 6% MVA Projected at 7.5% MVA Projected at 9%

401(a) and 401(h) – Total

27

Measures of Leverage

28

• On most measures of leverage, ASRS shows to be neutrally leveraged in relation to its peers

• However, the ASRS plans have a stated, robust contribution policy with a target towards higher funded levels, so the metrics as of today do not tell the whole story

• ASRS is expected to improve on all of these metrics quickly in relation to peers not only in the same current categories as ASRS, but ones that are currently ranked higher than ASRS in these metrics

ASRS Relative to Peers

UAAL/Payroll 160% Neutral

Ratio of Actives to Retirees 1.45 Neutral

Market Value of Assets/Payroll 394% Neutral

Liability/Payroll 544% Neutral

Change in ADC with 10% drop in assets

and no recovery2.60% Neutral

Weighted Open Group Duration in

Years18.3 Years Low to Neutral

28

2017 System Valuation Results

29

2015 Valuation 2016 Valuation

2017 Valuation

Before

Assumption

Changes

2017 Valuation

After

Assumption

ChangesActive Counts 6 6 1 1

In Payment Counts – Annuity 1,269 1,202 1,140 1,140

In Payment Counts – 13th Check 805 743 679 679

Actuarial Accrued Liability ($ Millions) $397.7 $376.8 $357.5 $333.6

Market Value of Assets ($ Millions) $316.6 $272.8 $265.6 $265.6

UAAL ($ Millions) $81.1 $104.0 $91.9 $68.0

Actuarial Funded Ratio 79.6% 72.4% 74.3% 79.6%

Prior Year Disbursements ($ Millions) $44.4 $44.0 $42.3 $42.3

Estimated Exhaustion Date Assuming No Future

Contributions N/A FY 2026 FY 2026 FY 2026

Remaining Actuarial Accrued Liability for

members who retired prior to July 1, 1981 $214,491 $185,930 $101,837 $79,837

2017 LTD Valuation Results

30

2015 Valuation 2016 Valuation

2017 Valuation

Before

Assumption

Changes

2017 Valuation

After

Assumption

ChangesPVFB ($ Millions) Not Available $403.3 $402.5 $415.2

UAAL ($ Millions) $67.2 $95.4 $114.2 $48.5

Actuarial Funded Ratio 79.1% 70.1% 63.5% 80.4%

Normal Cost Rate 0.19% 0.20% 0.21% 0.30%

Contribution Rate: Employer 0.14% 0.16% 0.18% 0.18%

Contribution Rate: Employee 0.14% 0.16% 0.18% 0.18%

Open Claims 4,002 3,797 3,534 3,534

Prior Year Claims Paid ($ Millions) $61.0 $60.1 $58.7 $58.7

• Change in actuarial cost method from PUC to EAN shifted a significant portion of the present value of future benefits (PVFB) from the UAAL to future normal costs. New assumptions resulted in a net increase in the cost of the LTD program.

• Final contribution rate incorporates an immediate recognition of the assumption changes. If the Board elects to phase in the impact of the changes, similar to the pension plan, the member contribution rate would be 0.16% for FY2019.

2017 Aggregate Results With 5-Year Phase In

Contribution rates effective for the 2019 fiscal year

Plan Plan Plan

401(a) 401(h) Total LTDContribution Rate: Employer 11.18% 0.46% 11.64% 0.18%

Contribution Rate: Employee 11.64% 0.00% 11.64% 0.18%

Contribution Rate: Total 22.82% 0.46% 23.28% 0.36%

Alternate Contribution Rate 10.41% 0.06% 10.47% 0.06%

Funded Ratio – AVA 69.7% 98.0% 70.5% 80.4%

Funded Ratio – MVA 71.5% 100.7% 72.4% 79.5%

31

Summary

• ASRS has a solid funding policy

• Took significant steps forward by improving the actuarial assumptions and methods

• Currently $975 million of deferred asset gains

– Will be incorporated into contribution rates over the next nine years

• Overall, outlook for plan health and plan funding is stable

32

Agenda Item #7





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

FROM: Mr. Paul Matson, Director DATE: December 21, 2017 RE: Agenda Item #7: Presentation, Discussion, and Appropriate Action Regarding

Delegating LTD Appeals to the ASRS Board Appeals Committee (AC) Purpose: To discuss the delegation of Long Term Disability (LTD) Appeals to the Board AC. Recommendation: The ASRS Board shall move to Delegate the responsibilities added to A.R.S. § 38-714(E)(1) by Laws 2017, Chapter 105 to the ASRS Board Appeals Committee. Background: On September 30, 2016, the ASRS Board by legal motion created an ASRS Board Appeals Committee as permitted by A.R.S. § 38-714(E)(1) to adjudicate ASRS appeals. This legal action and delegation was limited to non-LTD appeals because in 2016 the statute that governed LTD Appeals, A.R.S. § 38-797.03(B), explicitly retained authority with the ASRS Board. Therefore, the legal action in September 2016 by the ASRS Board was limited by their statutory authority at that time which was only the ability to delegate Article 2 - Retirement appeals (non LTD appeals) to the newly created Board Appeals Committee. Effective August 9, 2017, the language in A.R.S. § 38-714(E)(1) was expanded to add LTD appeals in Article 2.1 and Transfer Appeals in Article 7 in A.R.S. 38-714. See the attached statute, A.R.S. § 38-714 with the 2016 changes highlighted. Attachments: A.R.S. § 38-714(E)(1)


A.R.S. § 38-714. Powers and duties of ASRS and board

A. ASRS shall have the powers and privileges of a corporation, shall have an official seal and shall transact all business in the name "Arizona state retirement system", and in that name may sue and be sued.

B. The board is responsible for supervising the administration of this article by the director of ASRS.

C. The board is responsible for the performance of fiduciary duties and other responsibilities required to preserve and protect the retirement trust fund established by section 38-712.

D. The board shall not advocate for or against legislation providing for benefit modifications, except that the board shall provide technical and administrative information regarding the impact of benefit modification legislation.

E. The board may:

1. Determine the rights, benefits or obligations of any person under this article and any member under articles 2.1 and 7 of this chapter and afford any person dissatisfied with a determination a hearing on the determination. The board may delegate the duty and authority to act on the board's behalf to a committee of the board for the purposes of this paragraph and title 41, chapter 6, article 10 relating to any decision made under this paragraph by that committee of the board.

2. Determine the amount, manner and time of payment of any benefits under this article. 3. Recommend amendments to this article and articles 2.1 and 7 of this chapter that are required for efficient and effective administration.

4. Adopt, amend or repeal rules for the administration of the plan, this article and articles 2.1 and 7 of this chapter.

Agenda Item #8

Director’s Report: 8a - Operations

8b - Budget & Staffing

8d - Appeals 8e - Employers Reporting

Agenda Item #8a

Director’s Report Operations

Member Advisory Center: Phone

31 18 67 54 33 36 14 35 62 26 25 86

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

Timeliness (average wait time in seconds)0

5,000

10,000

15,000

20,000


Volume comparison of calls by month and year

Nov16-Oct17 = 179,041 ( 4.7% )

Nov15-Oct16 = 171,057

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Timeliness percent answered in 20 seconds or less

Rolling Year Avg. = 72%

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. = 3.3%

Objective

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Quality of agent response to member inquiries

Rolling Year Avg. = 97.0%91%

7%

1% 1%

Overall Satisfaction 3Q CY2017

Very Satisfied

Satisfied

Dissatisfied

Very Dissatisfied

98% satisfied

1

Member Secure Messages (MSM)

3.0 5.0 6.0 2.0 1.8 2.5 2.1 2.5 3.2 2.5 1.7 2.3 19% 15% 19% 50% 53% 14% 17% 12% 10% 22% 72% 45%

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

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

Nov16-Oct17= 17,476 ( 21.9% )

Nov15Oct16 = 14,333

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

Service Purchase

Account Inuquiries

Refund

New Retiree

Health Insurance

Number of messages

Reason for Contact top reasons -Sep 2017

64%

27%

7% 0% 2% 0%

Overall Satisfaction 3Q CY2017

Very Satisfied

Satisfied

Somewhat Satisfied

Somewhat Dissatisfied

Dissatisfied

Very Dissatisfied

98% satisfied

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Timeliness percent of secure messages responded to within 1 business day

Nov16-Oct17= 29% ( -60.9% )

Nov15-Oct16 = 74%

2

One-on-One Counseling

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

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

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

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

Health Insurance 5 7 3 4 7 4 6 0 5 4 7 0

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

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. = 98.36%Walk-ins Rolling Year Avg. = 97.63%Reception/MAC Express Rolling Year Avg. = 99.77%Health Insurance Rolling Year Avg. = 89.81%

0 200 400 600

Refunds

Forms:Rqst/Sbmt,…

Retired:Issues/Updates

New Retirement

Health Insurance

Number of Visits

Reasons for Visit top five reasons - Oct 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 Nov 16-Oct 17 ( 8,326 )

Walk-ins Nov 16-Oct 17 ( 2,257 )

Appointments Nov 16-Oct 17 ( 4,669 )

Total Nov 15-Oct 16 = 15,832

Total Nov 16-Oct 17 = 15,252 ( -4% )

80%

17%

3% 0% 0%

0%

Overall Satisfaction 3rd Quarter 2017

Completely Satisfied

Very Satisfied

Satisfied

Dissatisfied

Very Dissatisfied

Completely Dissatisfied

100% satisfied

3

Outreach Education and Benefit Estimates

0 1 0 1 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


Total Meeting Attendees by type of meeting Know Your Insurance Attendance Nov16-Oct17 = 1,836

Route 3 Webinar Attendance Nov16-Oct17= 367

Route 3 In-Person Attendance Nov16-Oct17 = 3,641

Route 4 Attendance Nov16-Oct17 = 2,465

Total Attendance Nov15-Oct16 = 9,224

Total Attendance Nov16-Oct17 = 8,309 ( -11% )

0

200

400

600

800

1,000

1,200

1,400

1,600


Benefit Estimate Volume comparison by month and year

Special Projects (Unrequested) Nov16-Oct17 = 2,514

All Requested Nov16-Oct17 = 2,528

Total Benefit Estimates Nov15-Oct16 = 8,327

Total Benefit Estimates Nov16-Oct17 = 5,615 ( -48% )

60%

70%

80%

90%

100%


Benefit Estimate Timeliness percent completed within 3 business days

Strategic Plan Objective


Member Satisfaction

74%

26%

0% 0% 0% 0% Route 3

3rd Quarter 2017

Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

100% satisfied

81%

17%

0% 0% 1% 1% Route 4

3rd Quarter 2017

Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

98% satisfied

51% 42%

0% 0% 5% 2% Benefit Estimates

3rd Quarter 2017

Very SatisfiedSatisfiedSomewhat SatisfiedSomewhat DissatisfiedDissatisfiedVery Dissatisfied

93% satisfied

4

Service Purchase

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

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

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


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

Oct 31, 2017

Cost

Invoices

Pending

192

Payments

Pending

21

0

250

500

750

1,000

1,250

1,500

1,750


Total Volume comparison by month and year

PDAs Processed Nov16-Oct17 = 29 ( -55% ) PDA Contracts Issued Nov16-Oct17 = 156 ( -54% )

Lump Sum Payments Nov16-Oct17 = 2,760 ( 44% ) Invoices Nov16-Oct17= 2,935 ( 31% )

Requests Nov16-Oct17 = 4,561 ( 35% ) Total Workload Nov15-Oct16 = 6,861

Total Workload Nov16-Oct17 = 10,441 ( 34% )

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

31%

31%

20%

6% 9%

3% Overall Satisfaction 3rd Quarter 2017

Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

82% satisfied

5

Refunds

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

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

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 Nov16-Oct17 = 12,884 ( -4% )

Requests Nov15-Oct16 = 13,340

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


Requests Pending

Rolling Year

95%

96%

97%

98%

99%

100%

July - Dec Jan - June

Refund Quality Rating FY 2017

FY 17 67%

23%

4% 2%

2%

2%


Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

94% satisfied

Dat

a n

ot

Ava

ilab

le

6

New Retiree and Pension Payroll

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

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

18 12 13 22 26 22 8 12 11 13 12 19


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


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


First Payment Volume comparison by month and year

Nov16-Oct17 = 9,209 ( 3% )

Nov15-Oct16 = 8,919

50%

60%

70%

80%

90%

100%


First Payment Timeliness percent disbursed in 10 business days


128,000

130,000

132,000

134,000

136,000

138,000

140,000

142,000

144,000

146,000


Pension Volume comparison by month and year

Nov16-Oct17 = 1,698,375 ( 4% )

Nov15-Oct16 = 1,633,910

0

200

400

600

800

1000

1200


Audits & Adjustments comparison by month and year

Adjustments Rolling Year = 512Audits Rolling Year = 7,454

50%

60%

70%

80%

90%

100%


Adjustments Timeliness Percent completed in 20 business days

Strategic Plan ObjectiveRolling Year Avg. = 98%

65%

26%

4% 3%

1% 1%


Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

95% satisfied

7

Survivor Benefits

Non Retired

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

Retired

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


Lump Sum (Non-Retired)

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

Annuity (Retired and Non-Retired)

5 5 5 4 3 2 2 3 3 2 2 2


Packet Timeliness (average TAT in days)

Payment Timeliness (average TAT in days)

0

100

200

300

400

500

600

700

800


Volume number of death notifications received

Non-Retired Nov16-Oct17 = 1,099 ( -53% )

Retired Nov16-Oct17 = 3,109 ( 17% )

Total Nov15-Oct16 = 4,280

Total Nov16-Oct17 = 4,208 ( -2% )

0

100

200

300

400

500


Packet Volume number of beneficiary packets

Non-Retired Nov16-Oct17 = 1,026 ( -8% )

Retired Nov16-Oct17 = 3,114 ( 5% )

Total Nov15-Oct16 = 4,064

Total Nov16-Oct17 = 4,160 ( 2% )

0

50

100

150

200

250


Payment Volume number of beneficiary payments

Lump Sum Nov16-Oct17 = 1,062 ( 16% )Annuity Nov16-Oct17= 834 ( 13% )Total Nov15-Oct16 = 1,524Total Nov16-Oct17 = 1,917 ( 21% )

20%

30%

40%

50%

60%

70%

80%

90%

100%


Packet Timeliness percent mailed in 15 business days or less


Non-Retired Nov16-Oct17 = 94%

Retired Nov16-Oct17 = 100%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%


Payment Timeliness percent paid in 10 business days or less


Lump Sum Nov16-Oct17 = 94%

67%

24%

0% 0%

5% 4%


Very Satisfied

Satisfied

Somewhat Satisfied


Dissatisfied

Very Dissatisfied

91% satisfied

8

Public Website: www.azasrs.gov

Followers: 2361 (+1%)

Followers: 449 (0%)

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

Nov16-Oct17 = 1,146,985 (+4%)

Nov15-Oct16 = 1,094,882

0 4,000 8,000 12,000

Medicare Plans

Benefit Payments

Retirement Central

Estimate Benefits

Health-care

Number of Visits

Most Visited Public Pages top five page visits Sept 2017

Social Media Oct 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

95% 87% 98% 92% 99%

Re

f

80% 79% 92% 84% 90%

Re

t67% 67% 81% 76% 90%

Ad

d

67% 73% 87% 78% 75%

Be

ne

83% 83% 88% 85% 75%

Ta

x

75% 69% 88% 80% 75%

DD 49% 37% 65% 54% 75%

Historical Comparison

of Online Usage

Total online

78%

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

Banking

Taxes

Beneficiaries

Address

Retire

Refund

Enrollment

Health Ins

Self Service Transactions Sep 2017

Online = 8,616Manual = 2,456Smart 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

Nov16-Oct17 = 1,169,972 (+1.7%)

Nov15-Dec16 = 1,150,443

Refund

MemberStatement

Beneficiary

AccountInformation

Benefit Estimator

Number of Visits

Most Visited Secure Pages Oct 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 #8b

Director’s Report Budget and

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 4,093,100 145,300 4,238,400 208,400 121,300 4,568,100 Variable Compensation Strategies Plan - - - Investment Incentive Compensation Plan 212,100 212,100 212,100

Total PS 4,305,200 - 145,300 4,450,500 208,400 121,300 4,780,200 Employee Related Expenses (ERE)Employer costs - benefits, taxes, charges 1,685,100 48,300 1,733,400 61,100 46,700 1,841,200

Total ERE 1,685,100 - 48,300 1,733,400 61,100 46,700 1,841,200 Professional and Outside Services (P&O)LTD Program administration 386,800 386,800 386,800 Pension payroll disbursement processing 266,300 266,300 266,300 IT Software Development 305,200 84,400 389,600 144,200 43,100 576,900 Actuarial and benefit consulting services 75,000 75,000 75,000 IT security professional services 142,700 200 142,900 142,900 Legal fees 150,600 150,600 - 150,600 Other outside services 15,600 4,100 19,700 19,700

Total P&O 614,100 386,800 430,000 1,430,900 144,200 43,100 1,618,200 TravelIn-state 5,500 5,500 5,500 Out-of-state 3,800 3,800 3,800

Total Travel 9,300 - - 9,300 - - 9,300 Other Operating ExpendituresOffice rent 591,700 591,700 591,700 Software licenses and support 180,000 180,000 180,000 Telecommunications 110,300 110,300 110,300 Risk management insurance premiums 150,600 150,600 150,600 Dues, subscriptions, publications 14,500 43,900 58,400 58,400 Postage and delivery 29,900 4,500 34,400 34,400 Education, training and conferences 7,800 7,800 7,800 Equipment repair and maintenance 9,300 9,300 9,300 Other operating supplies 27,100 27,100 27,100 External printing and mailing newsletters 2,100 2,100 2,100

Total Other Operating Expenditures 531,600 - 640,100 1,171,700 - - 1,171,700 EquipmentFurniture purchases/replacement 16,900 16,900 16,900 Network, server, PC and devices 11,400 11,400 - 11,400

Total Equipment 28,300 - - 28,300 - - 28,300 TOTAL 7,173,600$ 386,800$ 1,263,700$ 8,824,100$ 413,700$ 211,100$ 9,448,900$

APPROPRIATED / BUDGETED AMOUNTS 22,667,700$ 2,500,000$ 4,715,400$ 29,883,100$ 1,472,500$ 882,900$ 32,238,500$

% EXPENDED YTD 31.6% 15.5% 26.8% 29.5% 28.1% 23.9% 29.3%% OF FISCAL YEAR ELAPSED 33.3%

Administrative Projects BudgetBase Administrative BudgetFY 2018 ASRS Budget ReportAdministrative Expenses(Expenditures to Date as of October 31, 2017)

FY 2018 Budget Report Page 1

FY 2018 ASRS Budget ReportInvestment Expenses EXPENDED YTD

(as of October 31, 2017)

ESTIMATEDEXPENSES

(as of November 2017)

ESTIMATED EXPENSES

AS % OF TOTAL AUM

ESTIMATEDEXPENSES PER MEMBER

Investment Management ExpensesInternal Investment Management

Salaries and benefits 489,200$ 1,360,600$ Investment Incentive Compensation Plan (ICP)* 253,200$ 253,200$ Travel, education and training, rent, and other operational expenses 86,400$ 326,000$

Public MarketsExternal investment management fees -$ 56,879,600$ Transactional and other fees 518,800$ 4,000,000$

Private MarketsPrivate and opportunistic equity management fees 16,156,100$ 50,657,000$ Private and opportunistic equity performance incentive and other fees** 20,222,000$ 20,222,000$

Real estate, farmland and infrastructure management fees 3,458,600$ 8,644,500$ Real estate, farmland and infrastructure performance incentive and other fees** 5,763,200$ 5,763,200$

Private and opportunistic debt management fees 3,197,500$ 16,386,000$ Private and opportunistic debt performance incentive and other fees** 1,927,600$ 1,927,600$

Custodial Banking, Security Lending and Master Cash STIF Fees 287,000$ 2,900,000$ Investment Management Expenses Subtotal 52,359,600$ 169,319,700$ 0.44% 288.79$

Investment Related Consulting, Legal and Information Services ExpensesInvestment Consulting Services 679,200$ 3,972,100$ Investment Related Legal Services 167,100$ 1,845,000$ Investment Electronic Information Services 359,800$ 2,549,200$ External Financial Consulting Services -$ 113,500$

Services Expenses Subtotal 1,206,100$ 8,479,800$ 0.02% 14.46$ Total Investment Expenses 53,565,700$ 177,799,500$ 0.46% 303.25$

FY 2018 ASRS Budget ReportTotal Administrative and Investment Expenses EXPENDED YTD

(as of October 31, 2017)

ESTIMATEDEXPENSES

(as of October 2017)

ESTIMATED EXPENSES

AS % OF TOTAL AUM

ESTIMATEDEXPENSES PER MEMBER

Administrative Expenses (from Page 1 excluding ICP)* 9,195,700$ 31,985,300$ 0.08% 54.55$ Investment Expenses (including ICP)* 53,565,700$ 177,799,500$ 0.46% 303.26$

Total Expenses 62,761,400$ 209,784,800$ 0.54% 357.81$ ASRS Estimated Total Market Value of Assets Under Management (AUM) as of September 30, 2017 38,483,619,000$

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 seven (9) pay periods (35% 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

(October 31, 2017)

252 Full Time

Equivalents (FTEs)

New Hires

New Exits

Vacancies Vacancy

Rate ASRS by Division Director's Office/ Public Affairs/ Information Security (DIR)/ Leg. Liaison 22

0.0 0.0

8.0 36.36%

Administrative Services Division (ASD) 14 0.0

0.0 0.25

1.79% Financial Services (FSD) 78 0.0

3.0 12.75

16.35%

Technology Services (TSD) 52 1.0

1.0 4.0

7.69% Internal Audit (IAD) 6 0.0

0.0 2.0

33.33%

Investment Management (IMD) 13 0.0

0.0 4.0

30.77% Member Services (MSD) 67 0.0

1.0 8.25 12.31%

252 1.00 5.00 39.25 15.58%

Turnover October

2017 New Hires

October 2017 Exits

Total Exits (Last 12 Months)

Annualized Turnover %

1.0 5.0 31.00 13.64%

Turnover benchmarks: Arizona State Personnel System 2017: 18.1% BLS: State/Local 2016: 18.8% Compdata – Arizona 2016: 19.6%

Recruitments Beginning February 2015, all ASRS recruitments were placed on hold until further notice due to the State of Arizona Hiring Freeze. Specific ASRS positions are critical to the core functions and operations of the agency and if left unfilled will negatively impact the agency’s ability to meet goals and objectives. Recruitment for these “mission critical” positions may proceed after hiring supervisors complete and submit appropriate justification documents and upon approval of the agency director. In some instances, these additional steps have extended the recruitment turnaround time and contributed to the yellow status of some business units as noted on the following pages. We continue to work with the State of Arizona Hiring Freeze guidelines implemented February 2015.

• One position is under recruitment: FSD Financial Reporting Manager

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 October 2017 strategic objectives were not met. Six positions are vacant. Greater than normal risk is expected to remain until positions are filled and fully trained.

MSD One-on-one Counseling (Appointments/Walk-ins)

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

FSD New Retiree Processing


3


Impact Comments


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. The team is working extra hours and projects are taking longer to complete. Greater than normal risk will remain until the vacant positions have been filled.

FSD Contribution Collections and Posting

TSD Network Support

Demand for NIS resources has exceeded their capacity. Critical projects and daily support of users and systems have grown over time and have overloaded the team. At the end of October, we had one new team member start. Two external resources are assisting with projects. Evaluation of NIS staffing allocation is under review.

TSD Business Applications Development and Support

Our complement of resources for October 2017 was 46 (33 FTEs and 13 external resources).


4


Impact Comments


IMD Investment Management

DIR Board/Executive Staff Support

DIR Information Security

All full-time staff positions other than the Information Security Officer and Privacy Officer remain vacant. Security team objectives are being met using contract resources until recruitment and hiring for staff is complete.

DIR Strategic Planning/Analysis

DIR Strategic Communications

The number of resources available to manage and design publications (electronic/written), send targeted email campaigns, maintain website and social media platforms, and write/edit content has remained flat while customer demands continue to grow. This gap in resources risks errors and also jeopardizes this unit’s ability to meet strategic objectives.

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

Agenda Item #8c

Director’s Report Cash Flow Statement

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

Fiscal FiscalRetirement Retirement Health Benefit Long-Term 2018 2017

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

ADDITIONSContributions

Member contributions 88,042,472$ 534$ -$ 1,242,876$ 89,285,882$ 335,638,005$ 334,144,958$ Employer contributions 84,103,756 534 3,416,130 1,242,872 88,763,292 332,998,376 333,904,122 Alternative contributions (ACR) 2,481,911 - 27,077 34,675 2,543,662 8,160,574 7,770,639 Transfers from other plans 204,442 - - - 204,442 370,373 4,434 Purchased service 1,239,484 - - - 1,239,484 6,658,274 6,573,622

TOTAL CONTRIBUTIONS 176,072,064 1,067 3,443,207 2,520,423 182,036,762 683,825,601 682,397,775

DEDUCTIONS* Investment management fees - - - - - 15,637,003 14,201,083 Custody fees - - - - - - (41) Consultant and legal fees 201,949 - - - 201,949 870,070 614,718 Internal investment activity expense 472,968 - - - 472,968 1,079,642 1,041,734 Retirement and disability benefits 245,172,097 3,082,257 7,879,471 5,172,575 261,306,401 1,054,474,181 1,019,338,954 Survivor benefits 4,319,239 - - - 4,319,239 16,735,202 12,578,104 Refunds to withdrawing members, including interest 19,533,716 8,510 - - 19,542,227 94,505,148 94,378,445 Administrative expenses 1,976,101 - - 86,513 2,062,614 10,440,640 11,632,818 Transfers to other plans - - - - - 223,478 128,427 Other 24,290 - - - 24,290 72,411 72 TOTAL DEDUCTIONS 271,700,361 3,090,767 7,879,471 5,259,088 287,929,688 1,194,037,774 1,153,914,312

INCREASE (DECREASE) (95,628,297) (3,089,700) (4,436,264) (2,738,665) (105,892,926) (510,212,173) (471,516,537)

From securities lending activities:Security loan program 392,290 - - - 392,290 1,681,885 1,561,193 Security loan interest expense / (Rebate) 49,673 - - - 49,673 155,341 (401,800)

** Net income from securities lending activities 342,617 - - - 342,617 1,526,544 1,962,992

*** Capital Calls / (Distributions)Farmland and Timber - - - - - - - Infrastructure (2,109,166) (15,862) (92,238) (10,711) (2,227,976) (16,489,524) - Opportunistic Debt 23,454,778 176,606 1,025,972 118,174 24,775,531 148,811,994 89,334,692 Opportunistic Equity (677,703) (5,063) (29,633) (3,389) (715,788) (13,315,513) (8,675,936) Private Debt 91,486,931 687,279 3,994,609 449,384 96,618,203 349,255,621 191,139,527 Private Equity (20,974,519) (157,871) (917,131) (104,635) (22,154,156) (44,124,559) (55,075,727) Real Estate 26,319,174 198,041 1,150,901 133,357 27,801,473 7,677,359 (244,322,834) Owned Real Estate (80,065) (630) (3,529) (407) (84,631) (84,631) -

TOTAL Capital Calls 117,419,429 882,502 5,128,952 581,774 124,012,657 431,730,747 (27,600,278)

NET INCREASE (DECREASE) (212,705,108)$ (3,972,202)$ (9,565,217)$ (3,320,439)$ (229,562,967)$ (940,416,376)$ (441,953,267)$

* 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.

Agenda Item #8d

Director’s Report Appeals

OUTSTANDING ASRS APPEALS

Information as of November 17, 2017. Updates are noted in bold font.

Date Received Appeals Issues/Questions Regarding Status/Comments

7/14/2014 Sharon Di Giacinto & Richard K. Hillis

Appealing the ASRS determination that a Domestic Relations Order term is unacceptable.

Board upheld ALJ Decision on 1/30/2015. Superior Court Decision in favor of the ASRS issued on 9/25/15. Appellant Di Giacinto appealed to AZ Court of Appeals on 9/30/2015. Court of Appeals Decision in favor of Appellant DI Giacinto issued on 4/4/2017. Arizona Supreme Court denied the Petition for Review by Richard Hillis on 11/17/17.

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. Awaiting the Court to schedule an oral argument.

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. Briefing completed. Oral Argument held at Superior Court on 10/4/2017.

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. Following request from appellant and approval to cancel the 11/14/2017 meeting, scheduled to be heard at 12/12/2017 ASRS Board Appeals Committee meeting.

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. Scheduled to be heard at 12/12/2017 ASRS Board Appeals Committee meeting.

OUTSTANDING ASRS APPEALS

Information as of November 17, 2017. Updates are noted in bold font.

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

OAH hearing scheduled for 1/25/2018 following approval of appellant’s motion for continuance.

11/9/2017

William Arnold

Appellant is appealing for a retroactive rescind to Straight Life Annuity to November 2012.

OAH hearing was requested and is awaiting scheduling by OAH.

Agenda Item #8e

Director’s Report Employers Reporting


TOLL FREE OUTSIDE METRO PHOENIX AND TUCSON 1 (800) 621-3778

ARIZONA STATE RETIREMENT SYSTEM Paul Matson

Director

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

DATE: November 16, 2017 RE: Delinquent Employers As of November 16, 2017, 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:

PRESCOTT VALLEY CHARTER SCHOOL 7,000 * HOUSING AUTHORITY OF MARICOPA COUNTY 35,000 * SEQUOIA PATHWAY ACADEMY+ 57,000 * PICTURE ROCKS FIRE DISTRICT 800 * GREAT EXPECTATION ACADEMY 15,000 * DESTINY CHARTER SCHOOL 23,000 * FRANKLIN PHONETIC PRIMARY SCHOOL 31,000 * AMERICAN HERITAGE ACADEMY+ 120,000 * SEQUOIA CHOICE SCHOOL+ 42,000 * MOBILE ELEMENTARY 5,000 * CHEVELON BUTTE ELEMENTARY 1,000 * SEQUOIA VILLAGE SCHOOL+ 32,000 * SEQUOIA CHARTER SCHOOL+ 126,000 * PATHFINDER ACADEMY+ 43,000 * SEQUOIA RANCH SCHOOL+ 19,000 * SEQUOIA SCHOOL FOR THE DEAF AND HARD OF HEARING+ 20,000 * REDWOOD ELEMENTARY ACADEMY+ 14,000 * AZ CONSERVATORY FOR ARTS & ACADEMICS+ 26,000 *

$616,800 *

GRAND CANYON PREP 216,000++ LUZ ACADEMY 18,600+++ STARSHINE ACADEMY 67,500+++ $302,100 Total $918,900 * *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 Item #9





MEMORANDUM

TO: Arizona State Retirement System (ASRS) Board Trustees

FROM: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board DATE: November 21, 2017 RE: Agenda Item #9: Presentation, Discussion, and Appropriate Action Regarding the

Board Self-Evaluation Material Distribution Purpose According to the Board Governance Policy Handbook Section M, Board Performance Evaluation, the Board conducts an annual Self-evaluation and Overall Board Evaluation. Recommendation The Board Self-evaluation is currently scheduled and will immediately follow the regular Board meeting on February 23, 2018. There are two parts to the Board Self-evaluation process:

1. ASRS Trustee Self-evaluation: Please review the Trustee Self-evaluation document prior to the Overall Board Evaluation. The completion of this self-evaluation is to assist you in the Overall Board Evaluation; you do not need to submit the self-evaluation form to the Board Chair.

2. ASRS Board Evaluation: Please complete the Overall Board Evaluation Form and

submit the form and/or any comments to the Board Chair, Mr. Kevin McCarthy, prior to January 31, 2018. You may submit your evaluation materials and/or comments to Mr. McCarthy via email or U.S. mail. Your responses will be compiled and summarized for discussion at a February Board meeting.

Included in your Board book is a large envelope which includes the evaluation materials as well as contact information for Mr. McCarthy.


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