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
Board Meeting Agenda December 1, 2017 Page 2 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 Page 3 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.
Board Meeting Agenda December 1, 2017 Page 4 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
Paul Matson Director
ARIZONA 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
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.
ASRS Board Meeting October 27, 2017 Page 3 of 8
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.
ASRS Board Meeting October 27, 2017 Page 4 of 8
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.
ASRS Board Meeting October 27, 2017 Page 6 of 8
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
Paul Matson Director
ARIZONA 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
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.
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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.
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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
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Fiscal Year Performance
Arizona State Retirement System CIO Report 2 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
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
Arizona State Retirement System CIO Report 3 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
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
One Year Three Year Five Year Ten Year
in M
illio
ns
Relative to SAA Benchmark as of 9/30/17
Total Fund Dollar Value Add
Arizona State Retirement System CIO Report 4 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
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
Arizona State Retirement System CIO Report 5 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
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
Arizona State Retirement System CIO Report 6 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
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
One Year Three Year Five Year Ten Year
in M
illio
ns Total FundTotal PublicTotal PrivatesAllocation and Interaction
Relative to SAA Benchmark as of 9/30/17
Total Fund Dollar Value Add
Arizona State Retirement System CIO Report 7 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
Public Markets by Asset Class
Annualized Returnsas of 9/30/17
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
One Year Three Year Five Year Ten Year
in M
illio
ns Total PublicPublic EquityPublic Fixed IncomeOther
Total Public $ Value Add Relative to Composite Benchmarks
Arizona State Retirement System CIO Report 8 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
Public Equities Decomposition
Annualized Returnsas of 9/30/17
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
One Year Three Year Five Year Ten Year
in M
illio
ns
US Large CapUS Mid CapUS Small CapRisk FactorsPublic Opportunisticnon−US DevelopedEmerging Markets
Public Equity Value Add Relative to Composite Benchmarks
Arizona State Retirement System CIO Report 9 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
Public Fixed Income Decomposition
Annualized Returnsas of 9/30/17
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
One Year Three Year Five Year Ten Year
in M
illio
ns
Interest Rate SensitiveHigh Yield Fixed IncomeEmerging Market Debt
Public Fixed Income Value Add Relative to Composite Benchmarks
Arizona State Retirement System CIO Report 10 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
Public Markets by Active/Passive/Internal
Annualized Returnsas of 9/30/17
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
One Year Three Year Five Year Ten Year
in M
illio
ns
Total PublicExternal ActiveInternally ManagedExternal PassiveTransitions
Total Public $ Value Add Relative to Composite Benchmarks
Arizona State Retirement System CIO Report 11 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
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
Arizona State Retirement System CIO Report 12 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
IMD Projects
Return Decomposition
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%
Arizona State Retirement System CIO Report 13 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
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
Arizona State Retirement System CIO Report 14 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
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
Arizona State Retirement System CIO Report 15 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
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.
Arizona State Retirement System CIO Report 16 / 17
Portfolio PositioningPerformance Summary
Risk ReportIMD Asset Class Commitees
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
Arizona State Retirement System CIO Report 17 / 17
Agenda Item #5
Paul Matson Director
ARIZONA 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
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
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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,
The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System
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
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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
The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System
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
The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System
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
Baltimore, Maryland November 3, 2017
2
~ Cl if ton Larson Allen
The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System
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.
The Honorable Douglas A. Ducey, Governor State of Arizona and Board of Trustees Arizona State Retirement System
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
Baltimore, Maryland November 3, 2017
Agenda Item #6
3300 NORTH CENTRAL AVENUE • PO BOX 33910 • PHOENIX, AZ 85067-3910 • PHONE (602) 240-2000 4400 EAST BROADWAY BOULEVARD • SUITE 200 • TUCSON, AZ 85711-3554 • PHONE (520) 239-3100
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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
6/30/2015 Experience (Gain)/Loss 148,009,725 145,292,110 143,768,155 27 12,173,448
6/30/2016 Experience (Gain)/Loss 499,389,318 539,340,463 534,152,798 28 44,754,539
6/30/2016 Audit Recommendations 13,713,495 14,810,575 12,286,017 4 3,434,633
6/30/2017 Experience (Gain)/Loss 713,881,243 713,881,243 770,991,742 29 63,976,991
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)
6/30/2015 Experience (Gain)/Loss 60,631,880 55,987,148 53,382,525 12 6,558,884
6/30/2016 Experience (Gain)/Loss (73,311,634) (79,176,565) (75,906,821) 13 (8,892,471)
6/30/2017 Experience (Gain)/Loss (12,670,659) (12,670,659) (13,684,312) 14 (1,536,911)
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
Paul Matson Director
ARIZONA 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
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Timeliness percent answered in 20 seconds or less
Rolling Year Avg. = 72%
Objective
90%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Resolution Rate percent answered on first contact
Rolling year avg 99%
0%
2%
4%
6%
8%
10%
12%
14%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Abandonment Rate percent of calls abandoned
Rolling Year Avg. = 3.3%
Objective
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Quality of agent response to member inquiries
Rolling Year Avg. = 97.0%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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Benefit Estimate Timeliness (average TAT in days)
0
250
500
750
1,000
1,250
1,500
1,750
2,000
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Benefit Estimate Timeliness percent completed within 3 business days
Strategic Plan Objective
Rolling Year Avg. = 100%
Member Satisfaction
74%
26%
0% 0% 0% 0% Route 3
3rd Quarter 2017
Very Satisfied
Satisfied
Somewhat Satisfied
Somewhat Dissatisfied
Dissatisfied
Very Dissatisfied
100% satisfied
81%
17%
0% 0% 1% 1% Route 4
3rd Quarter 2017
Very Satisfied
Satisfied
Somewhat Satisfied
Somewhat Dissatisfied
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Lump Sum Timeliness percent within 10 business days
Strategic Plan Objective
Rolling Year Avg. = 94%
40%
50%
60%
70%
80%
90%
100%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Cost Invoices Timeliness percent within 15 business days
Strategic Plan Objective
Rolling Year Avg. = 93%
30%
40%
50%
60%
70%
80%
90%
100%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Payroll Deduction Agreement Timeliness (Rolling Year) percent within 5 business days
Strategic Plan Objective
Rolling Year Avg. = 88%
95%
96%
97%
98%
99%
100%
July-Dec Jan-June
Cost Invoice Quality Rating FY 2017
Strategic Plan Objective
FY 2017
31%
31%
20%
6% 9%
3% Overall Satisfaction 3rd Quarter 2017
Very Satisfied
Satisfied
Somewhat Satisfied
Somewhat Dissatisfied
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Timeliness percent disbursed in 10 business days
Strategic Plan Objective
Rolling Year Avg. = 99%
0
20
40
60
80
100
120
140
160
180
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Overall Satisfaction 3rd Quarter 2017
Very Satisfied
Satisfied
Somewhat Satisfied
Somewhat Dissatisfied
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct
10 10 7 13 11 10 8 13 8 5 6 3
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
First Payment Volume comparison by month and year
Nov16-Oct17 = 9,209 ( 3% )
Nov15-Oct16 = 8,919
50%
60%
70%
80%
90%
100%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
First Payment Timeliness percent disbursed in 10 business days
Rolling Year Avg. = 71%
128,000
130,000
132,000
134,000
136,000
138,000
140,000
142,000
144,000
146,000
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Audits & Adjustments comparison by month and year
Adjustments Rolling Year = 512Audits Rolling Year = 7,454
50%
60%
70%
80%
90%
100%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Adjustments Timeliness Percent completed in 20 business days
Strategic Plan ObjectiveRolling Year Avg. = 98%
65%
26%
4% 3%
1% 1%
Overall Satisfaction 3rd Quarter 2017
Very Satisfied
Satisfied
Somewhat Satisfied
Somewhat Dissatisfied
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Packet Timeliness (average TAT in days)
Payment Timeliness (average TAT in days)
0
100
200
300
400
500
600
700
800
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Packet Timeliness percent mailed in 15 business days or less
Strategic Plan Objective
Non-Retired Nov16-Oct17 = 94%
Retired Nov16-Oct17 = 100%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Payment Timeliness percent paid in 10 business days or less
Strategic Plan Objective
Lump Sum Nov16-Oct17 = 94%
67%
24%
0% 0%
5% 4%
Overall Satisfaction 3rd Quarter 2017
Very Satisfied
Satisfied
Somewhat Satisfied
Somewhat Dissatisfied
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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
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
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
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.
FY 2018 Budget Report Page 2
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.
FY 2018 Budget Report Page 3
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
Impact of Staffing (Vacancies, Recruitments, Internal Transfers) on ASRS Operational Performance
3
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
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).
Impact of Staffing (Vacancies, Recruitments, Internal Transfers) on ASRS Operational Performance
4
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
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
Impact of Staffing (Vacancies, Recruitments, Internal Transfers) on ASRS Operational Performance
5
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
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
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
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
Paul Matson Director
ARIZONA 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
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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