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ARIZONA STATE SENATE
Fifty-Fourth Legislature, Second Regular Session
AMENDED
public retirement systems; prefunding plan
Purpose
Establishes the Arizona Employers' Pension Prefunding Plan (AEPP Plan) to allow certain employers to prefund their required pension contributions and outlines AEPP Plan requirements. Allows the governing body of an employer who has established a defined benefit retirement plan (DB Plan) to authorize and request the State Treasurer to invest pension prefunding plan monies.
Background
Employers that participate in the Public Safety Personnel Retirement System (PSPRS) are cities, towns, fire districts, joint powers authorities, counties, Indian tribes and the state highway patrol, among others (A.R.S. § 38-842).
Employers participating in the Elected Officials Retirement System (EORP) are departments, agencies or political subdivisions that makes employer contributions to the plan on behalf of elected officials who participates in the plan (A.R.S. § 38-801).
Employers participating in the Corrections Officer Retirement Plan (CORP) are departments, agencies or political subdivision that have one or more employees in outlined positions (A.R.S. § 38-881).
Employers that participate in the Arizona State Retirement System (ASRS) are the State of Arizona, participating political subdivisions and participating political subdivision entities (A.R.S. § 38-711).
Current statute allows the State Treasurer to invest and reinvest monies in equity securities for any fund for which equity investment is authorized (A.R.S. § 35-314).
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
Arizona Employers' Pension Prefunding Plan Administration
1. Establishes the Arizona Employers' Pension Prefunding Plan (AEPP Plan) as a special trust fund to allow participating employers who provide a DB Plan to prefund the employer's required pension contributions.
2. Defines employer, relating to the AEPP Plan, as an employer who participates in PSPRS, EORP or CORP.
3. Requires the PSPRS Board to have the sole and exclusive control of the administration and investment of the AEPP Plan.
4. Requires all assets of and income earned on the AEPP Plan to be credited to the AEPP Plan.
5. Requires the PSPRS Board to offer each participating employer investment options for monies in the AEPP Plan consisting of cost-effective diversified investment portfolios in publicly traded investment options that do not exceed the risk and return profiles established by the PSPRS Board.
6. Allows the PSPRS Board to keep assets of the AEPP Plan separate or commingled in one or more group trusts, subject to the crediting of assets, receipts and earnings and charging of payments to the appropriate employer.
7. Requires each participating employer to pay the reasonable administrative costs as determined by the PSPRS Board at its sole and absolute discretion for the administration and investment of the AEPP Plan.
8. Requires the PSPRS Board to deposit into the AEPP Plan all monies received for administration costs of the AEPP Plan.
Participating Employers
9. Allows the PSPRS Board to authorize an employer to participate in the AEPP Plan subject to the terms and conditions set by the PSPRS Board.
10. Allows an authorized employer to elect to participate in the AEPP Plan if:
a) the employer's governing body adopts a resolution requesting to participate;
b) the employer submits a written request to participate with the resolution to the administrator of the PSPRS Board; and
c) the employer's governing body enters into a contract with the PSPRS Board setting forth the terms and conditions of participation in the AEPP Plan.
11. Allows the PSPRS Board to authorize a participating employer to transfer monies into the AEPP Plan and states that transferred monies are irrevocable and may not be refused by the PSPRS Board, refunded or returned.
12. Requires a transfer of monies into the AEPP Plan to:
a) satisfy the terms of the contract between the participating employer's governing body and the PSPRS Board;
b) satisfy the requirements under the applicable government accounting standards; and
c) not jeopardize the tax-exempt status of the AEPP Plan.
13. Allows the PSPRS Board to authorize a participating employer to transfer assets out of the AEPP Plan if the asset transfer:
a) satisfies the terms of the contract between the participating employer's governing body and the PSPRS Board;
b) satisfies the requirements under the applicable governmental accounting standards;
c) does not jeopardize the tax-exempt status of the AEPP Plan's income;
d) is to be used exclusively to pay required pension contributions and AEPP Plan administrative costs; and
e) is made solely to PSPRS to discharge the participating employer's required pension contributions to the applicable DB Plan.
14. Determines that AEPP Plan assets and any transfer of assets out of the AEPP Plan are not subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency laws or other process of law and are not assignable.
15. Specifies that, except for a participating employer, an employee, member, beneficiary or other individual or person does not have any right, title or interest in the AEPP Plan or assets.
AEPP Plan Termination or Employer Termination
16. Allows the PSPRS Board to terminate the AEPP Plan participation of a participating employer, if:
a) the PSPRS Board determines that a participating employer's obligations to pay required pension contributions have been satisfied in full with no remaining risk regarding the amounts to be paid or the value of assets held in the AEPP Plan;
b) a participating employer elects to cease participation;
c) the PSPRS Board finds that the participating employer has failed to satisfy the statutorily required terms and conditions; or
d) the AEPP Plan is terminated by the PSPRS Board or the AEPP Plan otherwise terminates.
17. Directs, if the PSPRS Board terminates AEPP Plan participation of a participating employer, any assets attributable to a specific employer after payment of obligations to be transferred to PSPRS to pay the participating employer's required pension contributions.
18. Requires, if the PSPRS Board terminates AEPP Plan participation of a participating employer, any remaining monies in excess of the amount necessary to satisfy the participating employer's required pension contributions to be transferred to the participating employer, if the transfer:
a) does not jeopardize the tax-exempt status of the AEPP Plan's income; and
b) complies with the requirements under the applicable governmental accounting standards.
AEPP Plan Annual Financial Statements
19. Requires the PSPRS Board to cause:
a) the annual financial statements of the AEPP Plan to be prepared in accordance with the applicable governmental accounting standards; and
b) a qualified independent certified accounting firm to conduct an audit of the financial statements for each fiscal year.
20. Requires, for the PSPRS Board's preparation of the annual employer actuarial valuation report regarding the DB Plan, a total asset amount comprised of the sum of the assets in the AEPP Plan and the assets of the DB Plan to be used in the calculation of the unfunded pension liability and the annual actuarial required contribution amount.
AEPP Plan Tax-Exempt Status
21. Exempts assets transferred into or out of or held in the AEPP Plan and investment income on assets in the AEPP Plan from state, county and municipal taxes.
22. States that the Legislature intends that the AEPP Plan's income not be subject to federal income tax and allows the PSPRS Board to adopt additional rules, policies and procedures to fulfill the Legislature's intent.
23. Disqualifies, if the PSPRS Board receives notification from the Internal Revenue Service that statutes or parts of statutes governing the AEPP Plan will jeopardize the tax-exempt status of the AEPP Plan's income, the applicable statutes or parts of statutes.
PSPRS Board Rules, Procedures and Discretionary Fiduciary Duty
24. Allows the PSPRS Board to adopt rules, policies and procedures for the AEPP Plan as the PSPRS Board deems necessary, including:
a) administering and investing the assets transferred into the AEPP Plan;
b) investment options; and
c) termination of employer's participation in the AEPP Plan.
25. Allows the PSPRS Board, in administering and investing the AEPP Plan, to employ services and do all acts that it deems necessary or appropriate for defending, protecting or advancing the AEPP Plan.
26. Grants the PSPRS Board full discretionary fiduciary authority to determine all questions arising in connection with administering and investing the AEPP Plan, including its interpretation and any factual questions arising under the AEPP Plan.
27. Requires any determination, authorization, approval, request, requirement or other action, election or decision, including the setting of terms and conditions by the PSPRS Board, be made in the sole and absolute discretion of the PSPRS Board.
28. States that the PSPRS Board and its employees, individual trustees, the administrator and deputy or assistant administrators:
a) do not guarantee the AEPP Plan against loss or depreciation and are not personally liable for any act or failure to act made in good faith in their official capacity; and
b) are indemnified from the assets of the AEPP Plan for any judgement against any of them, including attorney fees, costs and expenses incurred in the defense of claims.
29. Allows the PSPRS Board to appear before and maintain an action in political subdivisions, courts and other forums, through a representative or counsel appointed by the PSPRS Board, to defend, protect, advance or otherwise assert the interests of the AEPP Plan, the PSPRS Board and its employees, individual trustees, the administrator, deputy or assistant administrators and participating employers.
30. States that a PSPRS Board trustee or member is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data prepared or presented by:
a) the administrator, one or more deputy or assistant administrators or employees of PSPRS whom the PSPRS Board trustee or member believes is reliable and competent in the matters presented;
b) legal counsel, public accountants or other persons as to matters the PSPRS Board trustee or member believes are within the person's professional or expert competence; and
c) a committee of the PSPRS Board of which the PSPRS Board trustee or member is not a member if the PSPRS Board trustee or member believes the committee merits confidence.
31. Specifies that a PSPRS Board trustee or member is not liable for any action taken or any failure to take any action if the duties of the PSPRS Board trustee or member were performed in compliance with statute governing PSPRS Board fiduciary obligations.
32. Grants, in any legal proceeding or other forum, a PSPRS Board trustee or member all of the defenses and presumptions ordinarily available to a PSPRS Board trustee or member.
33. Specifies that a PSPRS Board trustee or member is presumed to have discharged their duties in compliance with statutes governing the PSPRS Board.
34. Specifies that the burden is on the party challenging the act, failure to act or other discharge of duties of or by a PSPRS Board trustee or member to establish by clear and convincing evidence facts rebutting the presumption.
35. Specifies that the Arizona Employers' Pension Prefunding Plan and assets are separate and apart from the PSPRS Fund and any other fund, program or plan administered by the PSPRS Board.
36. States that the Arizona Employers' Pension Prefunding Plan:
a) is an integral part of Arizona and of the political subdivisions of Arizona;
b) performs an essential governmental function; and
c) has the power to sue and be sued.
37. States that the Arizona Employers' Pension Prefunding Plan is intended to be structured and administered in a manner that results in the tax-exempt status of the Arizona Employers' Pension Prefunding Plan's income.
State Treasurer Investment Authority and Pension Prefunding Plan Accounts
38. Allows the governing body of an employer who has established a DB Plan to authorize and request the State Treasurer to invest pension prefunding plan monies in a pension prefunding plan investment account and set forth the terms of the distributions from such investment account for the employer.
39. Defines employer, relating to State Treasurer pension prefunding plan accounts, as an employer who participates in ASRS, PSPRS, CORP, EORP or any governing body of a political subdivision that has established a DB Plan for its employees.
40. Authorizes the State Treasurer to invest and reinvest pension prefunding plan investment account monies in equity securities.
41. Requires the State Board of Investment to serve as trustee of any pension prefunding plan investment accounts.
42. States the purpose of pension prefunding plan monies is to allow employers to prefund the employer's required defined benefit pension payments.
43. Requires all pension prefunding plan monies to be accounted for separately from all other funds.
44. Requires all pension prefunding plan investment account monies to be invested in safe interest‑bearing securities and prudent equity securities.
45. Requires the earnings, interest, dividends and realized capital gains and losses from the investment of each investment account to be credited to the corresponding investment account.
State Treasurer Pension Prefunding Plan Monies
46. States that pension prefunding plan monies are an integral part of Arizona and of the political subdivisions of Arizona and perform an essential governmental function.
47. States that the investments of pension prefunding plan monies are intended to be structured and administered in a manner that results in the tax-exempt status of the pension prefunding plan's income.
48. Allows the State Board of Investment to adopt rules, policies and procedures to ensure that the prefunding plan's income is not subject to federal tax.
49. Specifies that pension prefunding plan investment accounts and the money within are separate and apart from the Arizona Employers' Pension Prefunding Plan.
Miscellaneous
50. Defines terms.
51. Makes technical changes.
52. Becomes effective on the general effective date.
Amendments Adopted by Committee
1. Allows the State Board of Investment to adopt rules, policies and procedures to ensure that the prefunding plan's income is not subject to federal tax.
2. Modifies the purpose of pension prefunding plan monies to prefund a participating employer's required defined benefit pension payments, rather than their required pension contributions.
Senate Action
FIN 2/12/20 DPA 10-0-0
Prepared by Senate Research
February 13, 2020
MG/gs