ARIZONA HOUSE OF REPRESENTATIVES

Fifty-fourth Legislature

Second Regular Session

Senate: FIN DPA 10-0-0-0 | 3rd Read: 27-0-3-0

SB 1354: public retirement systems; prefunding plan

Sponsor:  Senator Livingston, LD 22

Committee on Government

Overview

Establishes the Arizona employers' pension prefunding plan and outlines requirements for prefunding plans.

History

The State Board of Investment (Board) is established in statute and consists of the State Treasurer, the Director of the Arizona Department of Administration, the Director of the Department of Insurance and Financial Institutions and two individuals appointed by the State Treasurer.  The Board is required to hold regular monthly meetings, review investments of treasury monies, serve as trustees of the permanent state land funds and serve as trustees of any endowments.  The State Treasurer is required to furnish the Board with a report of the performance of current investments and must make these reports available for public inspection (A.R.S. § 35-311).

Provisions

Pension Prefunding Plan Investment Accounts

1.    Authorizes the State Treasurer to invest and reinvest pension prefunding plan monies in equity securities for pension prefunding plan investment accounts. (Sec. 2)

2.    Stipulates that all pension prefunding plan monies must be accounted for separately from all other funds. (Sec. 2)

3.    Prohibits any monies from be taken from one investment account for deposit in another investment account. (Sec. 2)

4.    Requires all monies in pension prefunding plan investment accounts to be invested in prudent equity securities and safe interest-bearing securities. (Sec. 2)

5.    Specifies that the earnings, interest, dividends and realized capital gains and losses from the investment of each investment account must be credited to that account. (Sec. 2)

6.    Establishes that pension prefunding plan monies are for the purpose of prefunding the required pension contributions of an employer that provides a defined benefit pension plan to their employees. (Sec. 2)

7.    States that pension prefunding plan monies are an integral part of this state and its political subdivisions and perform an essential governmental function. (Sec. 2)

8.    Stipulates that the investments of pension prefunding plan monies are supposed to be structured and administered in a manner that results in the tax-exempt status of the income of the plan. (Sec. 2)

9.    Authorizes the Board to adopt policies, rules and procedures as it deems necessary to ensure that the income of the prefunding plan is not subject to federal income tax. (Sec. 2)

10.  Allows the governing body of an employer to authorize and request that the State Treasurer invest pension prefunding plan monies in a pension prefunding plan investment account and set the terms of the distributions from the investment account for the employer. (Sec. 2)

11.  Specifies that the pension prefunding plan investment accounts and monies are separate and apart from the Arizona employers' pension prefunding plan and its assets, receipts, earnings and income. (Sec. 2)

Arizona Employers' Pension Prefunding Plan

12.  Establishes the Arizona employers' pension prefunding plan as a special trust fund in order to allow participating employers that provide a defined benefit pension plan to prefund the employer's required pension contributions. (Sec. 3)

13.  States that the prefunding plan and the assets held in the plan are separate and apart from the following:

a)    Any other fund, program or plan administered by the Board including the public safety personnel retirement fund; and

b)    Any pension prefunding plan investment accounts and any pension prefunding plan monies. (Sec. 3)

14.  Stipulates that the prefunding plan is an integral part of Arizona and of the political subdivisions of this state, performs an essential governmental function and is an entity with the power to sue and be sued. (Sec. 3)

15.  Provides that the prefunding plan is supposed to be administered and structured in a manner that results in the tax-exempt status of the income of the prefunding plan. (Sec. 3)

State Board of Investment

16.  Establishes that the Board has sole and exclusive control of the administration and investment of the prefunding plan. (Sec. 3)

17.  Directs the Board to administer and invest the prefunding plan. (Sec. 3)

18.  Requires the Board to offer investment options to each participating employer for monies in the prefunding plan that consist of diversified, cost-effective investment portfolios in publicly traded investment options that do not exceed the risk and return profiles established by the Board and that are consistent with their fiduciary duty. (Sec. 3)

19.  Specifies that the provisions in current statute related to the administration and investment of PSPRS, including delegation of authority to the administrator and other people, supplement this Act. (Sec. 3)

20.  Allows the Board to keep assets of the prefunding plan separate or commingle those assets in one or more group trusts, subject to the crediting assets, earnings and receipts and charging of payments to the appropriate employer. (Sec. 3)

21.  Stipulates that all assets and income of the prefunding plan must be credited to the prefunding plan. (Sec. 3)

22.  Instructs each participating employer to pay the reasonable administrative costs that are determined by the Board. (Sec. 3)

23.  Mandates that the Board deposit all monies received by the Board in the prefunding plan for the administrative costs. (Sec. 3)

Employer Participation

24.  Authorizes the Board to allow an employer to participate in the prefunding plan, pursuant to the terms and conditions set by the Board. (Sec. 3)

25.  Allows an employer who is authorized by the Board to elect to participate in the prefunding plan if the following occur:

a)    The employer's governing body adopts a resolution requesting to participate in the prefunding plan;

b)    The employer submits a written request to the administrator of the Board that requests their participation in the prefunding plan with the resolution; and

c)    The employer's governing body enters into a contract with the Board that outlines the terms and conditions of their participation in the prefunding plan, including reflecting or incorporating the requirements of this Act and addressing expenditures and funding and actuarial, accounting, reporting and investment considerations. (Sec. 3)

Transfer of Monies

26.  Permits the Board to authorize a participating employer to transfer monies into the prefunding plan. (Sec. 3)

27.  Requires a transfer of monies into the prefunding plan to comply with the following:

a)    The transfer satisfies the terms of the contract between the participating employer and the Board;

b)    The transfer satisfies the requirements under applicable governmental accounting standards; and

c)    The transfer does not jeopardize the tax-exempt status of the income of the prefunding plan. (Sec. 3)

28.  Prescribes that transferred monies are irrevocable and may not be refused by the Board or refunded or returned to the participating employer. (Sec. 3)

Transfer of Assets

29.  Allows the Board to authorize a participating employer to transfer assets out of the prefunding plan if the transfer complies with the following:

a)    The transfer satisfies the terms of the contract between the participating employer and the Board;

b)    The transfer satisfies the requirements under applicable governmental accounting standards; and

c)    The transfer does not jeopardize the tax-exempt status of the income of the prefunding plan. (Sec. 3)

30.  Stipulates that, except as otherwise provided in statute:

a)    The prefunding plan assets must be used exclusively for the purpose of paying pension contributions and the administrative costs and may not be used for any other purpose; and

b)    A transfer of assets out of the prefunding plan must be made only for the purpose transferring assets to the system to discharge the participating employer's pension contributions to the appropriate defined benefit pension. (Sec. 3)

31.  Specifies that the prefunding plan assets and any transfer of assets are not subject to garnishment, execution, attachment, the operation of bankruptcy or insolvency laws or other process of law and are not unassignable. (Sec. 3)

32.  States that an employee, member, beneficiary or other individual does not have any right, title or interest in the prefunding plan or assets. (Sec. 3)

Termination of Employer's Participation

33.  Allows the Board to terminate the participation in the prefunding plan of a participating employer if any of the following applies:

a)    The Board determines that all obligations of a participating employer to pay the required contributions have been satisfied in full by payment or defeasance with no remaining risk;

b)    A participating employer elects to cease participation in the prefunding plan;

c)    The Board has determined that the participating employer has failed to satisfy the terms required by Board rules or the contract; or

d)    The prefunding plan is terminated by the Board or is otherwise terminated. (Sec. 3)

34.  Requires any assets to be transferred to the system to pay the participating employer's required pension contributions if the Board terminates the participation of a participating employer in the prefunding plan. (Sec. 3)

35.  Directs any remaining monies to be transferred to the participating employer only if both of the following apply:

a)    The transfer does not jeopardize the tax-exempt status of the income of the prefunding plan; and

b)    The transfer complies with the requirements under the applicable governmental accounting standards. (Sec. 3)

36.  States that the assets attributable to a participating employer's transfers into the prefunding plan are transferred to the system to pay the required pension contributions if the prefunding plan is terminated by the Board. (Sec. 3)

37.  Stipulates that any remaining monies will be transferred to the participating employer if certain requirements are met. (Sec. 3)

Annual Financial Statements

38.  Instructs the Board to cause the annual financial statements of the prefunding plan to be prepared according to the applicable governmental accounting standards. (Sec. 3)

39.  Requires an audit to be conducted of the financial statements by a qualified independent certified accounting firm for each fiscal year according to the governmental accounting standards that apply. (Sec. 3)

40.  Directs a total asset amount made up of the sum of the assets in the prefunding plan and the assets of the defined benefit pension to be used in the calculation of the unfunded pension liability and the annual actuarial required contribution amount. (Sec. 3)

Nontaxable Status

41.  Exempts the assets transferred into or out of or held in the prefunding plan and investment income on assets from state, county and municipal taxes. (Sec. 3)

42.  States that the Legislature intends the income of the prefunding plan to not be subject to federal income tax. (Sec. 3)

43.  Allows the Board to adopt additional rules, policies and procedures to fulfill the intent of the Legislature that the income not be subject to federal income tax. (Sec. 3)

44.  Specifies that the portion of this Act that causes the disqualification does not apply if the Board receives notification from the United States Internal Revenue Service that this Act will jeopardize the tax-exempt status of the income of the prefunding plan. (Sec. 3)

Board Rules and Procedures

45.  Authorizes the Board to adopt rules, policies and procedures regarding the prefunding plan as the Board deems necessary to implement this Act. (Sec. 3)

46.  Allows the Board to employ services, including legal services, that are necessary to defend, protect or advance the prefunding plan. (Sec. 3)

47.  States that the Board has full discretionary fiduciary authority to determine questions that arise in connection with the administration and investment of the prefunding plan. (Sec. 3)

48.  Requires any determination, authorization, approval, request, requirement or other action, election or decision to be made in the sole and absolute discretion of the Board relating to the prefunding plan. (Sec. 3)

49.  Specifies that the Board, individual trustees, the administrator, deputy or assistant administrators and employees do not guarantee the prefunding plan against loss or depreciation and are not personally liable of any claim arising from any act or failure to act made in good faith. (Sec. 3)

50.  Authorizes the Board to appear before and maintain an action in political subdivisions of Arizona, courts and other forums through a representative or counsel appointed by the Board to defend and protect the prefunding plan and the Board. (Sec. 3)

51.  Stipulates that a trustee or member of the Board is entitled to rely on information, opinions, reports or statements in connection with the prefunding plan by any of the following:

a)    The administrator, deputy or assistant administrator or employee of the system that they deem reliable and competent in the matters presented;

b)    Legal counsel, public accountants or other people they deem are within the professional or expert competence of the person; or

c)    A committee of the Board that they are not a member of that they believe merits confidence. (Sec. 3)

52.  Maintains that a trustee or Board member is not liable for any action taken or any failure to take any action if the duties were performed in compliance with statute. (Sec. 3)

53.  Specifies that a trustee or Board member has the defenses and presumptions ordinarily available in any legal proceeding or other forum. (Sec. 3)

54.  States that a trustee or Board member is presumed to have acted, failed to act or otherwise discharged their duties in accordance with statute. (Sec. 3)

55.  Asserts that the burden is on the party challenging the act, failure to act or other discharge of duties by a trustee or Board member to establish clear and convincing evidence that rebut the presumption. (Sec. 3)

Miscellaneous

56.  Requires the Board to serve as trustees of any pension prefunding plan investment accounts. (Sec. 1)

57.  Defines the following terms:

a)    administering and investing;

b)    board;

c)    defined benefit pension;

d)    employer;

e)    participating employer;

f)     prefunding plan;

g)    required pension contributions;

h)    system;

i)      tax-exempt status of pension prefunding plan's income; and

j)      trustee. (Sec. 2, 3)

58.  ☐ Prop 105 (45 votes) ☐ Prop 108 (40 votes) ☐ Emergency (40 votes) ☐ Fiscal NoteContains a severability clause. (Sec. 4)

59.  Makes technical changes. (Sec. 1)

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63.                    SB 1354

64.  Initials SJ  Page 0 Government

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