Arizona State Retirement System

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

October 27, 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, October 27, 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 August 25, 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 (estimated Time: 15 minutes) ................................................ Ms. Jessica Thomas Government Relations Officer

http://www.azasrs.gov/

Board Meeting Agenda October 27, 2017 of 4 4. Presentation, Discussion, and Appropriate Action Regarding the ASRS 2018 Regulatory

Agenda and Update on ASRS Rulemaking Initiatives (estimated Time: 5 minutes) ............................................................................................................. Ms. Jessica Thomas

5. 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 6. Presentation, Discussion and Appropriate Action Regarding Independent Reporting,

Monitoring, and Oversight (estimated time 20 minutes) ................................ Mr. Allan Martin Partner, NEPC

7. Presentation, Discussion, and Appropriate Action Regarding the ASRS Experience Study Presentation (estimated time 30 minutes) ....................................................... Mr. Ryan Falls

Actuary, Gabriel, Roeder, Smith and Company ..................................................................................................................... Mr. Joe Newton

Senior Consultant, Gabriel, Roeder, Smith & Company .................................................................................................................... Mr. Paul Matson

8. Presentation, Discussion, and Appropriate Action Regarding the ASRS Retiree Health Insurance Including: (estimated time 20 minutes) a. Goals b. Health Insurance, Cost Allocation and Pricing Options c. Retrospective Rate Agreement and Distribution Methodology Options d. Strategic Health Insurance Policies .................................................................................................................... Mr. Paul Matson ............................................................................................................. Mr. Anthony Guarino

Deputy Director and Chief Operations Officer ....................................................................................................................... Mr. Dave King Assistant Director, Member Services Division ............................................................................................................... Ms. Julie Lockwood Program Administrator ...................................................................................................................... Mr. Frank Perri Benefits Administrator ................................................................................................................. Mr. Brian Crockett Sr. Strategic Planning Analyst

Board Meeting Agenda October 27, 2017 of 4 9. Presentation, Discussion, and Appropriate Action Regarding the ASRS Fiscal Year 2019

Appropriated and Continuously Appropriated Budgets and Spending Plans (estimated time 5 minutes) .................................................................................................................... Mr. Paul Matson ............................................................................................................. Mr. Anthony Guarino .................................................................................................................... Mr. Russ Levine

Budget and Procurement Manager

10. Presentation, Discussion, and Appropriate Action Regarding a Change in the Operations, Audit and Legislative Committee (OALC) Membership Make-up (estimated time 3 minutes) ............................................................................................................... Mr. Kevin McCarthy

11. Presentation, Discussion, and Appropriate Action Regarding the Director's Report as well as Current Events (estimated time 5 minutes) .................................................................................................................... Mr. Paul Matson ............................................................................................................. Mr. Anthony Guarino a. 2017 Operations Report b. 2017 Budget and Staffing Reports c. 2017 Cash Flow Statement d. 2017 Appeals Report e. 2017 Employers Reporting

12. 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 November 14, 2017.

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

14. 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.

Board Meeting Agenda October 27, 2017 of 4

15. The next regular public ASRS Board meeting is scheduled for Friday, December 1, 2017, at

8:30 a.m., at 3300 N. Central Avenue, in the 10th Floor Board room, Phoenix, Arizona. 16. Adjournment of the ASRS Board. A copy of the agenda background material provided to Board Trustees (with the exception of material relating to possible executive sessions) is available for public inspection at the ASRS offices located at 3300 North Central Avenue, 14th Floor, Phoenix, Arizona and 4400 East Broadway Boulevard, Suite 200, Tucson, Arizona. The agenda is subject to revision up to 24 hours prior to meeting. These materials are also available on the ASRS website (https://www.azasrs.gov/content/board-and-committee-meetings) approximately 48 hours prior to the meeting. Persons with disabilities may request a reasonable accommodation such as a sign language interpreter or alternate formats of this document by contacting Tracy Darmer, ADA Coordinator at (602) 240-5378 in Phoenix, at (520) 239-3100, ext. 5378 in Tucson, or 1-800-621-3778, ext. 5378 outside metro Phoenix or Tucson. Requests should be made as early as possible to allow time to arrange the accommodations. Dated October 20, 2017 ARIZONA STATE RETIREMENT SYSTEM Signed Agenda on File Signed Agenda on File Alicia Guzman Paul Matson Board Administrator Director

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

Agenda Item #2


ARIZONA STATE RETIREMENT SYSTEM


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

MINUTES PUBLIC MEETING

ARIZONA STATE RETIREMENT SYSTEM BOARD

Friday, August 25, 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 8:35 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 (Joined the meeting at 8:37 a.m.) Mr. Jim Hillyard Mr. Michael Lofton Mr. Michael Miller

Absent: Mr. Rene Guillen Mr. Harry Papp One vacant position. A quorum was present for the purpose of conducting business. 2. Approval of the Minutes of the May 26, 2017 Public Meeting of the ASRS Board. Motion: Mr. Tom Manos moved to approve the minutes of the May 26, 2017 Public Meeting of the ASRS Board. Mr. Jim Hillyard seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 2 excused, and 1 vacancy, the motion was approved. 3. Presentation, Discussion, and Appropriate Action Regarding the ASRS Fiscal Year

(FY) 2018 Audit Plan Mr. Paul Matson, ASRS Director, introduced the topic of discussion and turned the presentation over to Mr. Harold Mackey, Internal Auditor, who presented on behalf of Mr. Bernard Glick, Chief Internal Auditor. Mr. Mackey noted the Internal Audit Division (IAD) has prepared an Audit

ASRS Board Meeting August 25, 2017 Page 2 of 6 Plan for the agency that proposes the auditable activities for FY 2018, which is based on a Risk Assessment conducted by the ASRS executive and senior managers, under the oversight of the Operations, Audit and Legislative Committee (OALC) and in collaboration with the IAD. The total hours available to perform audits or audit-related work will be approximately 5,400. The IAD will report to the OALC on a quarterly basis to provide an update on their progress. The reports will contain the budgeted and actual hours for each assigned audit. Mr. Mackey advised the Board of the IAD staff makeup, and further noted that an explanation of the objectives, scope, estimated hours, and reason for each audit appears on pages 7-9 of the ASRS Internal Audit Work Plan for FY 2018. He concluded his discussion by responding to questions from the Board. Mr. Jim Hillyard inquired if the 2,600 hours dedicated to employer audits had changed from the previous fiscal year. Mr. Mackey responded that they had not. Motion: Mr. Clark Partridge moved to approve the Audit Plan for FY 2018. Mr. Michael Miller seconded the motion. By a vote of 6 in favor, 0 opposed, 0 abstentions, 2 excused, and 1 vacancy, the motion was approved. 4. Presentation Regarding Government Finance Officers Association (GFOA) Financial

Reporting Awards Mr. Anthony Guarino, Deputy Director and Chief Operations Officer, announced the ASRS has been recognized by the GFOA for the twenty-eighth consecutive year as the recipient of the Comprehensive Annual Financial Report (CAFR) award. A Certificate of Achievement is presented by the GFOA to those government units whose annual financial reports are judged to adhere to program standards and represents the highest award in government financial reporting. In addition, the ASRS received the GFOA Award for Outstanding Achievement for the 2016 Popular Annual Financial Report (PAFR). Mr. Guarino further recognized the following staff for compiling the data and having a substantial roll in the receipt of these awards: Nancy Bennet, Erin Higbee, Jeremy Pond, John Maczko, Hong Mayhew, Rebecca Fox, Karl Polen, Lupita Breland, Kerry White and Nathaniel Brengle. 5. Presentation, Discussion, and Appropriate Action Regarding the ASRS Investment

Program Updates Mr. Karl Polen, Chief Investment Officer, introduced himself to the Board, noting the new CIO report is a much shorter format in comparison to the previous reports. He briefly reviewed the over and under-weights of each asset class, Total Fund positioning, and the historical and FY Total Fund performance. He further elaborated on the Investment Management Division’s (IMD) current activities, their views of the market, and the investment risk reports. Mr. Polen concluded his discussion noting two of the major projects the IMD is currently working on that will impact and be visible to the Board include an ongoing program to upgrade the IMD’s performance measurement systems. These measurements provide a thorough understanding of where excess returns and underperformances are coming from and are critical in the ability to evaluate the group’s investment decisions to determine crucial areas in need of improvement, as well as

ASRS Board Meeting August 25, 2017 Page 3 of 6 the areas that are performing well. The other area major activity entails updates to the Strategic Asset Allocation (SAA), which can be expected to come to the Board sometime in the coming months. Mr. McCarthy stated he was very pleased with the investment reports, noting the volume is just right and the information proceeds in a logical fashion, which he found to be very useful. 6. Presentation, Discussion, and Appropriate Action Regarding Interim Changes to the

ASRS Strategic Asset Allocation (SAA) Mr. Al Alaimo, Sr. Portfolio Manager of Fixed Income, Cash and Liquid Alternatives, reviewed changes to the SAA reviewed and accepted with the consensus of the non-quorum Board at the February 24, 2017, non-quorum Board meeting. Recommended interim changes to the SAA from that meeting included the following:

• Increase the policy target for Private Debt to 12% from 10% (recent weighting approximately 10.1%)

• Expand the range for Private Debt to 8-16% from 8-12% • Reduce the policy target for U.S. High Yield to 2% from 4% (recent weighting

approximately 2.4%) • Establish a range for U.S. High Yield of 0-6%

Mr. Alaimo noted the shift to a higher policy target for Private Debt and a lower policy target for U.S. High Yield will provide a benefit in higher expected returns and reduced volatility. In addition, Private Debt offers the most attractive opportunity in fixed income markets with high expected net returns available for investors willing to accept illiquidity and a delayed deployment of capital. The market opportunity for Private Debt is principally driven by regulatory constraints that make it unattractive for banks to hold illiquid loans or debt of below investment-grade credit quality. Mr. Alaimo concluded his discussion with a detailed explanation of the Private Debt program, the type of loans Private Debt is comprised of and gave general examples of the loan and funding process for these types of investments. Motion: Mr. Tom Manos moved to confirm changes to the ASRS Strategic Asset Allocation made by consensus of a non-quorum Board at the February 24, 2017, non-quorum Board meeting effective April 1, 2017. Mr. Clark Partridge seconded the motion. By a vote of 6 in favor 0 opposed, 0 abstentions, 2 excused, and 1 vacancy, the motion was approved. 7. Presentation, Discussion, and Appropriate Action Regarding ASRS Budget Related

Topics: a. Presentation/update of the ASRS Appropriated and Continuously Appropriated

Budget Plans to Include the ASRS Administrative and Investment Spending Plans for FY 2018.

b. Presentation of the ASRS Appropriated and Continuously Appropriated Budget Request and the ASRS Administrative and Investment Spending Plans for FY 2019.

ASRS Board Meeting August 25, 2017 Page 4 of 6 Ms. Martha Rozen, Chief of Administrative Services, introduced the topic of discussion, stating the materials include the spending plan for FY 2018 and the budget request for FY 2019. Ms. Rozen commented on a few of the highlights, noting the spending and budget plans are set up to be flexible to meet the ASRS Strategic Initiatives. The budget request for FY 2019, include reductions to the following expenditures:

1. A decrease of $225,000 in funding for the lump-sum base operating budget. 2. A decrease of $300,000 in funding for the administration of the ASRS Long Term

Disability (LTD) Program. 3. A decrease of five (5) appropriated full-time employees (FTE).

Ms. Rozen then turned the presentation over to Mr. Russ Levine, Procurement and Budget Manager. Mr. Levine introduced himself to the Board, opening up his discussion with facts relating to the ASRS budget plan, noting all funds utilized by the ASRS are trust fund dollars, as general funds are not used to conduct the daily operations of the ASRS. Mr. Levine noted the full spending plan is presented to the Board; however, the subset of the spending plan is what is subject to legislative appropriations. The Legislature appropriates for the ASRS both the authority to spend the trust fund dollars, as well as the number of ASRS FTEs the ASRS can employ. Mr. Levine further reviewed the appropriations and continuous appropriations presented in the materials, noting the Board will be approving the funding for the continuous appropriations of the Budget Spending Plan, which do not require legislative approval. Ms. Kerry White, Assistant Chief Investment Officer, provided the Board with a detailed explanation of the Budget Spending Plan for the Investment Management Division, noting the ASRS Investment Plan is designed to appropriately plan for the investment management costs and related consulting fees needed to meet the Board’s investment objectives. Ms. White noted internal investment costs for the ASRS are approximately half of a basis point of the Total Fund, which is reflective of the IMD’s continuous efforts to strive and look for ways to spend less and get more value for their expenditures. Additional discussions ensued with questions from the Trustees. Motion: Mr. Clark Partridge moved to approve an appropriated budget request for FY 2019 in the amount of $24,642,700, an administrative spending plan of $31,195,700, and an investment spending plan of $145,409,300, as well as any private markets performance incentive and other fees when identified and paid. Mr. Michael Miller seconded the motion. By a vote of 6 in favor 0 opposed, 0 abstentions, 2 excused, and 1 vacancy, the motion was approved. 8. Presentation, Discussion, and Appropriate Action Regarding the Alternate

Contribution Rate (ACR) for FY 2018 Mr. Matson, Director, briefly introduced the topic of discussion advising the Board the agenda item was being discussed to clarify the ACR presented at the December 2, 2016, Board meeting. The ACR is 9.36% for the Pension and Health Insurance Supplement, and an additional 0.13% for LTD, for a combined ACR of 9.49% for FY 2018. Motion: Mr. Clark Partridge moved to clarify the December 2, 2016, Board member consensus that the Alternate Contribution Rate (ACR) is 9.36% for Pension and Health Insurance Premium

ASRS Board Meeting August 25, 2017 Page 5 of 6 Supplement, and an additional 0.13% for Long Term Disability (LTD), for a combined total ACR of 9.49% for fiscal year 2018. Mr. Jim Hillyard seconded the motion. By a vote of 6 in favor 0 opposed, 0 abstentions, 2 excused, and 1 vacancy, the motion was approved. 9. Presentation and Discussion Regarding the ASRS Experience Study Education Mr. Ryan Falls, Actuary for Gabriel, Roeder, Smith & Company (GRS), along with Mr. Joe Newton, GRS Pension Market Leader and Actuary, and Mr. Paul Wood, GRS Actuary, provided a detailed analysis of the ASRS Experience Study Findings, noting the purpose of the findings is simply informational data, the Board will not be adopting or taking action on any of the findings at the end of the presentation; the information is being provided as a means to help the Board make informed decisions when determining future contribution rates and will also assist them in understanding the actuarial liabilities of the ASRS Trust Fund. Additional discussions ensued with questions from the Trustees; there were none. 10. 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. 11. 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 October 4, 2017.

b. Investment Committee (IC) Mr. Karl Polen announced the next IC meeting is scheduled to be held on September 29, 2017. c. Appeals Committee (AC)

Mr. Tom Manos announced the next AC meeting is scheduled to be held on September 12, 2017

12. Board Requests for Future Agenda Items No requests were made.

ASRS Board Meeting August 25, 2017 Page 6 of 6 13. Call to the Public No one from the public requested to speak. 14. The next regular ASRS Board meeting is scheduled for Friday, October 27, 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, October 27, 2017 at 8:30 a.m. 15. Adjournment of the ASRS Board Motion: Mr. Jim Hillyard moved to adjourn the August 25, 2017, Board Meeting at 10:58 a.m. Mr. Tom Manos seconded the motion. By a vote of 6 in favor 0 opposed, 0 abstentions, 2 excused, and 1 vacancy, the motion was approved. Respectfully Submitted by: Gloria Montiel Board Administrator ARIZONA STATE RETIREMENT SYSTEM

Agenda Item #3





MEMORANDUM

TO: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director Ms. Jessica Thomas, Government Relations Officer DATE: October 13, 2017 RE: Agenda Item #3: Presentation, Discussion and Appropriate Action Regarding the

ASRS 2018 Legislative Initiatives Purpose To discuss the proposed ASRS initiatives for the 2018 legislative session. Recommendation Recommend approval of the proposed 2018 Legislative Agenda. Background During the summer, the Government Relations Officer received legislative suggestions from ASRS staff and Trustees concerning plan design issues; plan inefficiencies, inconsistencies, and inequities; administrative concerns; and others. The Government Relations Officer researched and discussed each suggestion in conjunction with Trustees, Executive Management, and other internal staff accordingly. Staff is seeking approval from the ASRS Board to proceed with the proposed 2018 Legislative Agenda. Attachments: 2018 Legislative Agenda A.R.S. § 38-718 Redlined Version A.R.S. § 38-701 Redlined Version A.R.S. § 38-751 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 ASRS MAY ENTER INTO CONTRACTS 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.

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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 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 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) AN EMPLOYER, OTHER THAN THIS STATE OR A CHARTER SCHOOL, 13 DISSOLVES. 14 (d) THROUGH LEGISLATIVE ACTION, THE EMPLOYER IS NO LONGER ENROLLING 15 NEW EMPLOYEES IN ASRS OR NO LONGER CONTRIBUTING TO ASRS ON BEHALF OF 16 CURRENT EMPLOYEES OR GROUPS OF EMPLOYEES WHO OTHERWISE WOULD BE ELIGIBLE 17 FOR ASRS MEMBERSHIP. 18 4. For this state, the character of a state agency, board or 19 commission changes from public to private. 20 B. ASRS shall determine the schedule and method of payment of the 21 allocated liability. 22 C. The liability allocated to an employer under this section is 23 equal to the sum of the following: 24 1. The plan employer actuarial accrued liability multiplied by the 25 plan total deficit percentage. 26 2. The LTD program employer actuarial accrued liability multiplied 27 by the LTD program total deficit percentage. 28 2. FOR THE PURPOSES OF THIS SECTION, CONSIDERED TO BE NO LONGER 29 PARTICIPATING IN ASRS AS A RESULT OF A REDUCTION OF THIRTY PERCENT OR MORE

IN THE NUMBER OF ACTIVELY CONTRIBUTING EMPLOYEES OVER A THREE-YEAR PERIOD OR A REDUCTION OF FIFTY PERCENT OR MORE IN THE NUMBER OF ACTIVELY CONTRIBUTING EMPLOYEES, BASED ON THE NUMBER OF CONTRIBUTING EMPLOYEES AS OF THE EFFECTIVE DATE OF THIS AMENDMENT TO THIS SECTION, OVER ANY PERIOD OF TIME.

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 -

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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 AND LTD PROGRAM BENEFITS PAID TO THE NONPARTICIPATING 24 EMPLOYER'S MEMBERS WHO ARE ACTIVE, INACTIVE, RETIRED OR ON LONG-TERM 25 DISABILITY. 26 4. THE APPLICABLE SHARE OF THE INVESTMENT GAINS AND LOSSES. 27 5. EXPENSES ASSOCIATED WITH THE ADMINISTRATION OF THE 28 NONPARTICIPATING EMPLOYER'S SEPARATE FUND, INCLUDING ANY ADMINISTRATIVE, 29 DEVELOPMENT, ACTUARIAL, LEGAL, CUSTODIAL AND INVESTMENT MANAGEMENT COSTS 30 ASSOCIATED WITH THE FUND. THESE EXPENSES SHALL BE PAID DIRECTLY BY THE 31 NONPARTICIPATING EMPLOYER OR INCLUDED IN THE EMPLOYER'S LIABILITY FOR THE 32 PURPOSES OF DETERMINING THE EMPLOYER'S CONTRIBUTION RATE. 33 E. AFTER ESTABLISHING THE NONPARTICIPATING EMPLOYER'S SEPARATE 34 FUND, THE NONPARTICIPATING EMPLOYER AND ANY EMPLOYEES OF THAT EMPLOYER WHO 35 ARE ENROLLED IN ASRS SHALL CONTINUE TO HAVE CONTRIBUTION REQUIREMENTS TO 36 THE NONPARTICIPATING EMPLOYER'S SEPARATE FUND. THE CONTRIBUTION 37 REQUIREMENTS SHALL BE CALCULATED AS FOLLOWS: 38 1. ALL EMPLOYEES OF THE NONPARTICIPATING EMPLOYER WHO ARE ENROLLED 39 IN ASRS SHALL CONTINUE TO MAKE CONTRIBUTIONS THROUGH PAYROLL DEDUCTIONS 40 BASED ON THE CONTRIBUTION RATE DETERMINED FOR THE EMPLOYEES OF 41 PARTICIPATING EMPLOYERS OF ASRS PURSUANT TO SECTION 38-736. 42 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 43 LUMP SUM PAYMENTS IN ACCORDANCE WITH SECTION 38-735, EQUAL TO THE SUM OF: 44 (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. 28 E. I. 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

38-871. 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





MEMORANDUM

TO: Mr. Kevin McCarthy, Chair, Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director Ms. Jessica Thomas, Government Relations Officer DATE: October 13, 2017 RE: Agenda Item #4: Presentation, Discussion, and Appropriate Action Regarding the

ASRS 2018 Regulatory Agenda and Update on ASRS Rulemaking Initiatives Purpose To provide an update on the rulemaking activities listed on the 2016 and 2017 Regulatory Agendas and discuss the rulemaking activities proposed for the 2018 Regulatory Agenda. Recommendation Recommend approval of the proposed 2018 Regulatory Agenda. Background Arizona Revised Statutes § 41-1021.02 State agencies; annual regulatory agenda requires each agency to post its agenda for the coming calendar year. The attached 2016 Regulatory Agenda lists all the rulemakings the ASRS anticipated promulgating during the 2016 calendar year and the attached 2017 Regulatory Agenda lists all the rulemakings the ASRS anticipates promulgating during the 2017 calendar year. Ms. Jessica Thomas, Government Relations Officer, will provide a brief update of the status for each remaining rulemaking on the 2016 and 2017 Regulatory Agendas, as well as a brief overview of each proposed rulemaking on the 2018 Regulatory Agenda. Attachments: 2016 Regulatory Agenda 2017 Regulatory Agenda 2016/2017/2018 Rulemaking Update

2018 Regulatory Agenda


ARIZONA STATE RETIREMENT SYSTEM (ASRS) REGULATORY AGENDA FOR 2016

Pursuant to A.R.S. § 41-1021.02, the ASRS prepared a regulatory agenda for the 2016 calendar year. Pursuant to A.R.S. § 41-1021.02(D), the ASRS may undertake a rulemaking even if the rulemaking is not included in the annual regulatory agenda. Rulemakings Expected During 2016

Identification of Rulemaking

Notice of Docket Opening

(Expected)

Notice of Proposed Rulemaking (Expected)

Notice of Final Rulemaking

(Expected) 2 A.A.C. 8, Art. 1 R2-8-116. Working After Retirement

RTW guide in rule?

2/5/2016 2/12/2016 5/3/2016

2 A.A.C. 8, Art. 7 Contributions Not Withheld 3/11/2016 3/18/2016 6/7/2016

2 A.A.C. 8, Art. 2 (expired) Health Insurance

Long-Term Disability

Premium Benefit Eligibility

4/15/2016 4/22/2016 7/6/2016

2 A.A.C. 8, Art. 6 Public Participation in Rulemaking

5/13/2016 5/20/2016 8/2/2016

2 A.A.C. 8, Art. 8 Overpayments 6/10/2016 6/17/2016 9/7/2016

2 A.A.C. 8, Art. 3 (reserved) Membership

Contributions Accrual of credited

service (higher education credited service)

Apportionment Delinquency Compensation 20/20 criteria and

status changes—“intent” / “engaged”

10/7/2016 10/21/2016 1/4/2017

Existing Rules Scheduled for Review During 2016

Rules Being Reviewed Due Date 2 A.A.C. 8, Article 6 March 2016 2 A.A.C. 8, Article 7 December 2016

ARIZONA STATE RETIREMENT SYSTEM (ASRS)

REGULATORY AGENDA FOR 2017




(Expected)



(Expected) 2 A.A.C. 8, Art. 1 R2-8-125: Termination Incentive Program Liability

1/6/2017 1/13/2017 2/28/2017

2 A.A.C. 8, Art.9 Compensation

What compensation is pensionable

Service Credit Accrual

How contributions are made

7/10/2017 7/14/2017 9/8/2017

2 A.A.C. 8, Art. 10 Membership Eligibility

“engaged to work” 20/20 criteria

8/7/2017 8/10/2017 10/3/2017

2 A.A.C. 8, Art. 1 Lump sum threshold 9/4/2017 9/8/2017 11/7/2017

2 A.A.C. 8, Art. 5 R2-8-501: Definition of Termination

10/2/2017 10/6/2017 11/28/2017

1

Update on Rulemaking Initiatives for Board on October 27, 2017

2016 Rulemakings • The ASRS filed a Notice of Final Rulemaking and Economic Impact Statement with the Secretary

of State regarding the ASRS Long-Term Disability program on September 14, 2017. The rules will be effective November 13, 2017.

• The ASRS filed a Notice of Final Rulemaking and Economic Impact Statement with the Secretary of State regarding the ASRS Overpayments program on September 14, 2017. The rules will be effective November 13, 2017. 2017 Rulemakings

• The ASRS filed a Notice of Final Rulemaking and Economic Impact Statement with the Secretary of State regarding the definition of “Board” in R2-8-401 on September 14, 2017. The rule will be effective November 13, 2017.

• The ASRS filed a Notice of Final Rulemaking and Economic Impact Statement with the Secretary of State regarding Compensation on September 14, 2017. The rules will be effective November 13, 2017.

• In August 2015, the Auditor General issued a Performance Audit and Sunset Review Report for the ASRS. That report identified issues requiring administrative action regarding employer Termination Incentive Programs as defined in A.R.S. § 38-749. The ASRS filed a Notice of Final Rulemaking and Economic Impact Statement with the Secretary of State regarding Termination Incentive Programs on September 14, 2017. The rules will be effective November 13, 2017.

• On August 3, 2017, the ASRS received approval from the Governor’s Office to proceed with rulemaking regarding membership. Staff has begun working on this initiative and anticipates submitting a Notice of Proposed Rulemaking to the Secretary of State by December 2017.

• Although the 2017 Regulatory Agenda identified the following rulemakings, the ASRS has determined to postpone these rulemakings until 2018 due to Oracle Modernization of Service Purchase and the anticipated rulemaking regarding R2-8-126: Calculating Optional Forms of Benefits.

o Lump sum threshold o Definition of “termination of employment”

2

2018 Rulemakings

• The ASRS anticipates completing three rulemakings in 2018. Due to Oracle Modernization of service purchase processes, the ASRS will need to update all of its rules related to Service Purchase (Article 5) and Contributions Not Withheld (Article 7). Additionally, the ASRS needs to update R2-8-126 in order to be more clear and concise, as well as to include retirement application requirements and other retirement related requirements or limitations.

DRAFT DRAFT DRAFT ARIZONA STATE RETIREMENT SYSTEM (ASRS)

REGULATORY AGENDA FOR 2018




(Expected)



(Expected) 2 A.A.C. 8, Art. 5 Service Purchase April 2, 2018 April 2, 2018 June 1, 2018

2 A.A.C. 8, Art. 7 Contributions Not Withheld April 2, 2018 April 2, 2018 June 1, 2018

2 A.A.C. 8, Art.1 R2-8-126:

• Retirement Eligibility for Inactive Member

• J&S option requires a beneficiary on file

• Retirement and Re-retirement applications

• Lump sum threshold • Rollover distribution

allowed to only one account

• Direct deposit form vs. VISA benefit card

August 6, 2018 August 6, 2018 October 5, 2018

Agenda Item #5

Portfolio PositioningPerformance Summary

Risk ReportIMD Asset Class Commitees

IMD Projects

CIO Report

Arizona State Retirement System

October 27, 2017

Arizona State Retirement System CIO Report 1 / 17



IMD Projects

Fiscal Year Performance

‐0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

$33.50

$34.50

$35.50

$36.50

$37.50

$38.50

$39.50

6/30/2

017

7/10/2

017

7/17/2

017

7/24/2

017

7/31/2

017

8/7/2017

8/14/2

017

8/21/2

017

8/28/2

017

9/5/2017

9/12/2

017

9/19/2

017

9/26/2

017

10/3/2

017

10/10

/201

7Total Fund Performance as of 10/10/2017

Market Value FY Return




IMD Projects

Total Fund Positioning

Market Value Weight Interim Target Over/Under

US Equity 10.2 26.4% 26% 0.4%

non‐US Equity 9.3 24.2% 24% 0.2%

Private Equity 3.4 8.9% 8% 0.9%

Core Bonds 4.0 10.3% 13% ‐2.7%

Credit 6.1 15.7% 12% 3.7%

Real Estate 3.4 8.9% 10% ‐1.1%

Other 2.2 5.6% 7% ‐1.4%

Total Fund 38.6 100.0% 100% 0.0%

Market Value as of 10/10/2017

Houseviews:

Neutral on equities

Underweight rates, but overweight credit

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




IMD Projects

Return Decomposition

Trailing Returns & Dollar Value Add

0%

5%

10%

One Year Three Year Five Year Ten Year

Ann

ualiz

ed R

etur

n

Total Fund SAA Benchmark

Trailing Period Returns as of 6/30/17Total Fund & SAA Benchmark

$0

$500

$1,000

$1,500


in M

illio

ns

Relative to SAA Benchmark as of 6/30/17Total Fund Dollar Value Add




IMD Projects


Total Fund Returns

−32%

−24%

−16%

−8%

0%

8%

16%

24%

32%

40%

1980 1990 2000 2010

Annu

al R

etur

n

Rolling 1 Yr

Rolling 10 Yr

Rolling 20 Yr

1, 10, and 20 Year Rolling Returns




IMD Projects


Attribution Analysis

−2%

0%

2%

4%

2008 2010 2012 2014 2016 2018

Cum

ulat

ive

Exce

ss R

etur

n (L

ine)

AttributionAllocation

Selection

Interaction

Residual

as of 6/30/17Total Fund Brinson Attribution




IMD Projects


Total Fund by Private and Public Markets

Annualized Returnsas of 6/30/17

One Year Three Year Five Year Ten YearTotal Fund 13.88% 5.73% 9.65% 5.63%

SAA Benchmark 13.98% 4.77% 8.82% 5.19%Excess -0.1% 0.95% 0.83% 0.43%

Public_Markets 13.9% 4.16% 8.77% 5.3%Benchmark 14.08% 4.23% 8.77% 5.13%

Excess1 -0.18% -0.07% 0% 0.18%Private Markets 13.66% 10.72% 11.94% 10.25%

Benchmark1 13.89% 7.97% 9.61% 8.83%Excess2 -0.23% 2.75% 2.32% 1.43% $0

$10

$20

$30

2008 2010 2012 2014 2016 2018

in B

illio

ns

Public Markets Private Markets

as of 6/30/17

Total Fund Quarterly Weights

$0

$500

$1,000

$1,500


in M

illion

s Total FundTotal PublicTotal PrivatesAllocation and Interaction

Relative to SAA Benchmark as of 6/30/17

Total Fund Dollar Value Add




IMD Projects


Public Markets by Asset Class


One Year Three Year Five Year Ten YearPublic Equity 18.93% 5.7% 11.6% 5.33%

Public Equity Benchmark 19.84% 5.92% 11.83% 5.42%Public Equity Excess -0.91% -0.22% -0.23% -0.09%Public Fixed Income 2.17% 2.46% 2.52% 4.9%

Public Fixed Income Benchmark 2.3% 1.89% 2.23% 4.65%Public Fixed Income Excess -0.13% 0.56% 0.29% 0.25%

Other 5.94% -2.7% 3.07% 3.15%Other Benchmark 0.22% -2.66% 2.47% 1.53%

Other Excess 5.72% -0.04% 0.59% 1.61%

$0

$10

$20

2010 2015

in B

illio

ns

Public Equity Public Fixed Income Other

Public Manager Market Values as of 6/30/17

$0

$300

$600


in M

illio

ns Total PublicPublic EquityPublic Fixed IncomeOther

Total Public $ Value Add Relative to Composite Benchmarks




IMD Projects


Public Equities Decomposition


One Year Three Year Five Year Ten YearUS Large Cap.US Large Cap 16.97% 9.59% 14.47% 7.23%

US Large Cap.Benchmark 17.9% 9.61% 14.63% 7.18%US Large Cap.Excess -0.93% -0.03% -0.16% 0.05%

US Mid Cap.US Mid Cap 18.87% 8.22% 15.03% 8.51%US Mid Cap.Benchmark 18.57% 8.53% 14.92% 8.56%

US Mid Cap.Excess 0.3% -0.31% 0.11% -0.05%US Small Cap.US Small Cap 20.28% 6.99% 14.37% 8.14%

US Small Cap.Benchmark 22.47% 9.32% 15.48% 8.44%US Small Cap.Excess -2.19% -2.33% -1.11% -0.31%

Risk Factors.Risk Factors 17.28% 10.24% NA% NA%Risk Factors.Benchmark 19.99% 6.03% NA% NA%

Risk Factors.Excess -2.71% 4.21% NA% NA%non-US Developed.non-US Developed 20.67% 1.8% 9.07% 1.92%

non-US Developed.Benchmark 20.59% 1.64% 9.36% 2.54%non-US Developed.Excess 0.08% 0.16% -0.29% -0.63%

Emerging Markets.Emerging Markets 22.19% 0.47% 4.16% NA%Emerging Markets.Benchmark 23.75% 1.07% 4.06% NA%

Emerging Markets.Excess -1.55% -0.6% 0.1% 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 6/30/17

$−400$−300$−200$−100

$0$100


in M

illio

ns

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

Public Equity Value Add Relative to Composite Benchmarks




IMD Projects


Public Fixed Income Decomposition


One Year Three Year Five Year Ten YearInterest Rate Sensitive -0.1% 2.93% 2.52% 4.77%

Benchmark -0.32% 2.49% 2.22% 4.49%Excess 0.21% 0.44% 0.3% 0.28%

High Yield Fixed Income 11.16% 4.85% 6.85% NA%Benchmark1 12.71% 4.49% 6.9% NA%

Excess1 -1.55% 0.36% -0.05% 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 6/30/17

$0$25$50$75


in M

illio

ns Interest Rate SensitiveHigh Yield Fixed IncomeEmerging Market Debt

Public Fixed Income Value Add Relative to Composite Benchmarks




IMD Projects


Public Markets by Active/Passive/Internal


One Year Three Year Five Year Ten YearExternal Active 16.4% 2.92% 7.83% 4.85%

External Active Benchmark 15.15% 3.22% 7.73% 4.58%External Active Excess 1.25% -0.3% 0.1% 0.27%

Internally Managed 13.4% 8.49% 12.14% 7.87%Internally Managed Benchmark 13.27% 8.43% 12.06% 7.73%

Internally Managed Excess 0.13% 0.06% 0.07% 0.14%External Passive 13.72% 2.08% 7.33% 5.25%

External Passive Benchmark 13.42% 1.69% 7.14% 4.99%External Passive Excess 0.3% 0.39% 0.18% 0.26%

$0

$10

$20

2010 2015

in B

illio

ns

External Active Internally Managed External Passive

Public Manager Market Values as of 6/30/17

$−300

$0

$300

$600

$900


in M

illion

s Total PublicExternal ActiveInternally ManagedExternal PassiveTransitions

Total Public $ Value Add Relative to Composite Benchmarks




IMD Projects


Private Markets Decomposition

Annualized Returnsas Reported 6/30/17

One Year Three Year Five Year InceptionTotal Private Markets 13.66% 10.72% 11.94% 10.25%

Benchmark 13.89% 7.97% 9.61% 8.83%Excess -0.23% 2.75% 2.32% 1.43%

$0

$2,500

$5,000

$7,500

$10,000

$12,500

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 6/30/17

$0$200$400$600$800

One Year Three Year Five Year Inception

in M

illion

s

Total PrivatesPrivate EquityReal Estate.CurrentOpportunistic DebtPrivate DebtFARMReal Estate.Legacy

Private Markets Dollar Value Add Relative to Composite Benchmarks




IMD Projects


Private Markets Composites

Annualized Return

as Reported 6/30/17

One Year Three Year Five Year InceptionPrivate Equity 17.3% 10.88% 12.64% 12.02%PE Benchmark 24.53% 6.12% 10.76% 11.25%

PE Excess -7.24% 4.77% 1.88% 0.77%Real Estate Current 13.79% 15.57% 16.83% 16.74%

RE Current Benchmark 7.79% 11.06% 11.09% 11.12%RE Current Excess 6% 4.51% 5.74% 5.62%Real Estate Legacy 1.88% 8.79% 10.92% 5.94%

RE Legacy Benchmark 7.82% 11.95% 11.54% 6.08%RE Legacy Excess -5.94% -3.16% -0.62% -0.14%

Opportunistic Debt 16.12% 5.82% 7.83% 9.87%Opp Debt Benchmark 12.33% 6.32% 7.19% 9.55%

Opp Debt Excess 3.8% -0.5% 0.64% 0.33%Private Debt 13.01% 10.81% NA% 11.52%

PD Benchmark 12.3% 7.08% NA% 7.26%PD Excess 0.7% 3.73% NA% 4.26%

Farmland & Infrastructure 6.56% 5.88% NA% 5.76%Farmland Benchmark 5.58% 5.6% NA% 5.59%

Farmland Excess 0.98% 0.28% NA% 0.17%




IMD Projects

Value at Risk

TOTAL PORTFOLIO VALUE‐AT‐RISK (VAR)

7

Annualized Total VaR have declined over the last year. As of July 31, 2017, total VaR for ASRS Portfolio was 13.5%, indicating that there is a 5% chance that portfolio could lose ~$4.8B in a given year. Note that a 5% event is expected to occur every 20 years

13.5%

13.1%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

Mar‐16 May‐16 Jul‐16 Sep‐16 Nov‐16 Jan‐17 Mar‐17 May‐17 Jul‐17

Value‐at‐Risk (VaR) Over Time

Total Portfolio SAA




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




IMD Projects

Combined Public and Private Markets Committee SummaryActivities

From August 3, 2017

Approved a new commitment to a comingled fund in real estate.

Approved the increase of $200M to an existing real estate separate account

manager.




IMD Projects

IMD Project Status

Equities active management

Multi asset strategy review

Securities lending review

Liquidity strategy

Int l Equities Factor Strategy

Strategic asset allocation review

LTD SAA and unitization

RRA Unitization

Signals for tactical views

Fixed income performance measurement

Total fund performance measurement

Private Debt Reporting Enhancements

Opportunistic Portfolios Reporting Enhancements

Migration to web based reporting and interactive graphics

Realtime performance estimation

Manager Fee SOP

Israel Boycott Divestment SOP

Legal RFP

Custody RFP

IMD Database

Total fund attribution

Equities trading optimization

Middle office review

2017

−07

2018

−01

2018

−07

2019

−01

Date

Statusdone

future

in process

ASRS Investment Management Division Projects


Agenda Item #6

900 Veterans Blvd. | Ste. 340 | Redwood City, CA 94063-1741 | TEL: 650.364.7000 | www.nepc.com BOSTON | ATLANTA | CHARLOTTE | CHICAGO | DETROIT | LAS VEGAS | SAN FRANCISCO

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

From: Mr. Allan Martin, Partner, Consultant, NEPC

Date: October 19, 2017

Subject: Agenda Item #6: Presentation, Discussion and Appropriate Action Regarding Independent Reporting, Monitoring and Oversight

Purpose To present and discuss information regarding the independent reporting, monitoring and oversight of the ASRS Investment Program. Recommendation Informational only; no action required. Background NEPC is responsible for providing an independent reporting, monitoring and oversight function from the Investment Program information which is presented by the CIO and IMD. As a result, NEPC has developed reports for both the Investment Committee and Board designed to 1) provide the appropriate level of investment information for the purposes of independent oversight (ASRS SAAP compliance, Asset Class Committee minutes review, investment selection due diligence packet compliance, etc.); 2) provide ASRS investment program performance relative to its goals/objectives (presented quarterly); and 3) communicate NEPC’s perspectives on the market environment, investment outlook or other initiatives or topics they believe are important to convey to the Board. As of June 30, 2017 the Total Fund’s market value was approximately $37.2 billion. For the one-year period ending June 30, 2017, the Total Fund returned 13.9% (net of fees), underperforming the Interim 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%. Over the past ten years, the Total Fund has returned 5.6% per annum, and since inception, the portfolio’s performance is 9.7%. NEPC will provide a review of Total Fund performance and an independent assessment of the ASRS investment program. Attachments:

• NEPC’s Independent Reporting, Monitoring and Oversight reports

Arizona State Retirement SystemIndependent ASRS Investment Program Oversight

for the Period Ending June 30, 2017

October 27, 2017

Allan Martin, Partner, NEPCDon Stracke, Sr. Consultant, NEPC

Michael Malchenko, Sr. Analyst, NEPC

1

•ASRS Investment Objectives/Performance

•Independent Oversight/Compliance

•SAA Policy Compliance•Total Fund and Asset Class Analysis•Asset Class Committee Monitoring

•Market Environment Update and Outlook

•Appendix: SAA Policy History


June 30, 2017

Contents

2

ASRS Investment Objectives/PerformanceNote: All of the data shown on the following pages is as of June 30, 2017 and reflects the deduction of investment manager fees, unless otherwise noted.

3

• Objective #1: Achieve a twenty-year rolling annual total fund net rate of return equal to or greater than the actuarial assumed interest rate.

• Objective #2: Achieve one- and three-year rolling annual total fund net rates of return equal to or greater than the return of the ASRS Strategic Asset Allocation Policy (SAAP) Benchmark.

• Objective #3: Achieve one- and three-year rolling annual net rates of return for ASRS strategic asset classes that are equal to or greater than their respective strategic asset class benchmarks.

• Objective #4: Ensure sufficient monies are available to meet pension benefits, health insurance, member refunds, administrative payments, and other cash flow requirements.

Macro

Micro

Source: ASRS Strategic Plan, March 2013

Arizona State Retirement SystemASRS Investment Objectives

June 30, 2017

4

20 Year Annualized

Return

Total Fund 7.0%

Constant 8% 8.0%

Excess Return (1.0)%

• Objective #1: Achieve a twenty-year rolling annual total fund net rate of return equal to or greater than the actuarial assumed interest rate.

Arizona State Retirement SystemTotal Fund Performance

June 30, 2017

Goal Met: No

5

• Objective #2: Achieve one- and three-year rolling annual total fund net rates of return equal to or greater than the return of the ASRS Strategic Asset Allocation Policy (SAAP) Benchmark.

Quarter 1 Year 3 Years 5 Years 10 Years

Since Inception (6/30/75)

Total Fund 3.2% 13.9% 5.7% 9.6% 5.6% 9.7%

Interim SAA Policy1 2.9% 14.0% 4.8% 8.8% 5.2% 9.5%

Excess Return 0.3% -0.1% 0.9% 0.8% 0.4% 0.2%

1Composition of SAA Policy can be found in the appendix.


1 Year Goal Met: No 3 Year Goal Met: Yes

Total Fund Performance

June 30, 2017

6

Arizona State Retirement SystemTotal Fund Attribution Analysis

Total Plan 1 Year 3 Years 5 Years

Allocation Effect1 -0.04% 0.33% 0.40%

Manager Selection Effect2 -0.06% 0.60% 0.47%

Residual3 0.00% 0.03% -0.04%

Excess Return -0.10% 0.96 0.83

June 30, 2017

The Brinson-Fachler Attribution model explains excess return by identifying the size of contributors or detractors from excess return based on the three effects defined below:

1. Allocation Effect: Measures the impact of the decision to over/under weight asset classes relative to Interim SAAP benchmark weights. (Return Asset Class Index –Total Interim Policy Index Return) × (Weight Asset Class Portfolio − Weight Asset Class Interim Policy Index).

2. Manager Selection Effect: Measures the impact of over/under performance of asset classes in the portfolio relative to the asset class benchmarks in the Interim SAAP benchmark. [Weight Asset Class Benchmark × (Return Portfolio Asset Class − Return Asset Class in Interim Policy Index)] + Interaction Effect: Measures the impact of over/under weighting decisions and over/under performance. (Return Asset Class Portfolio (Weight Asset Class Portfolio − Weight Asset Class Policy Index))−(Return Asset Class Index (Weight Asset Class Portfolio − Weight Asset Class Index)).

3. Residual: Contribution to excess return not captured in Allocation Effect and Manager Selection Effect.

7

Arizona State Retirement SystemTotal Fund Attribution Detail

1 Year Excess Return: -0.10%

• Allocation Effect: -0.04%– Opportunistic Debt tactical overweight (-0.22%)– International Equity tactical underweight (-0.18%)– Domestic Equity tactical underweight (-0.14%)– Assetized Cash overweight (-0.11%)– Multi-Asset Class Strategies underweight (+0.26)– Inflation-Linked Assets underweight (+0.22%)– Public Markets Fixed Income tactical underweight (+0.15%)

• Manager Selection Effect: -0.06%– Private Equity underperformed due to various managers (-0.77%)– Domestic Equity underperformed due to various managers (-0.29%) – Opportunistic Debt outperformed (+0.31%)– Real Estate outperformed (+0.31%)– Multi-Asset Class Strategies outperformed (+0.28%)– Private Opportunistic Equity outperformed (+0.11%)

• Residual: 0.00%

June 30, 2017


Allocation Effect: Measures the impact of the decision to over/under weight asset classes relative to Interim SAAP benchmark weights. (Return Asset Class Index – Total Interim Policy Index Return) × (Weight Asset Class Portfolio − Weight Asset Class Interim Policy Index).

Manager Selection Effect: Measures the impact of over/under performance of asset classes in the portfolio relative to the asset class benchmarks in the Interim SAAP benchmark. [Weight Asset Class Benchmark × (Return Portfolio Asset Class − Return Asset Class in Interim Policy Index)] + Interaction Effect: Measures the impact of over/under weighting decisions and over/under performance. (Return Asset Class Portfolio (Weight Asset Class Portfolio − Weight Asset Class Policy Index))−(Return Asset Class Index (Weight Asset Class Portfolio − Weight Asset Class Index)).

Residual: Contribution to excess return not captured in Allocation Effect and Manager Selection Effect.

Allocation EffectManager Selection EffectExcess Return

8

Total Fund Attribution DetailArizona State Retirement System

3 Year Excess Return: +0.96%

• Allocation Effect: +0.33%– Inflation-Linked Assets tactical underweight (+0.29%)– Multi-Asset Class Strategies underweight (+0.12%)– Public Markets Fixed Income tactical underweight (+0.09%)– Private Opportunistic Equity tactical overweight (+0.04%)– Domestic Equity tactical underweight (-0.15%)– International Equity tactical underweight(-0.08%)

• Manager Selection Effect: +0.60%– Private Debt outperformed due to various managers (+0.24%)– Real Estate outperformed due to various managers (+0.24%)– Private Equity outperformed due to various managers (+0.16%)– Opportunistic Equity outperformed (+0.09%)– Domestic Equity underperformed (-0.13%)

• Residual: +0.03%

June 30, 2017






9

Total Fund Attribution DetailArizona State Retirement System

5 Year Excess Return: +0.83%

• Allocation Effect: +0.40%– Public Markets Fixed Income tactical underweight (+0.49%)– Inflation-Linked Assets tactical underweight (+0.22%)– Domestic Equity tactical underweight (-0.15%)– International Equity tactical overweight (-0.14%)

• Manager Selection Effect: +0.47%– Private Debt outperformed due to various managers (+0.20%)– Real Estate outperformed due to various managers (+0.19%)– Opportunistic Equity outperformed (+0.12%)– Multi-Asset Class Strategies outperformed (+0.05%)– Risk Factors outperformed (0.04%)– International Equity underperformed (-0.09%)– Domestic Equity underperformed (-0.07%)

• Residual: -0.04%

June 30, 2017






10

1 Year Return 3 Year Return

ASRS Total Domestic and Int'l Equity1 18.9% 5.7%ASRS Custom Total Equity Benchmark 20.0% 6.0%

Excess Return -1.1% -0.3%

ASRS Domestic Equity 17.3% 9.1%ASRS Custom Domestic Equity Benchmark 18.6% 9.5%


ASRS International Equity 20.9% 1.4%ASRS Custom Int'l Equity Benchmark 21.3% 1.6%


ASRS Public Markets Fixed Income 2.2% 2.5%ASRS Custom Fixed Income Benchmark 3.0% 1.9%

Excess Return -0.8% 0.6%

ASRS Inflation-Linked -3.8% -15.0%ASRS Custom Inflation-Linked Benchmark -6.5% -14.8%

Excess Return 2.7% -0.2%

ASRS Multi-Asset Class Strategies 8.8% -0.9%ASRS Multi-Asset Class Strategies Benchmark 0.5% 0.2%

Excess Return 8.3% -1.1%


1Performance of ASRS Total Domestic and Int’l Equity includes the performance of the ASRS Domestic Equity and ASRS International Equity asset classes and theEquity Risk Factor Portfolio with an inception date of 6/1/2013.

Note: Composition of ASRS Custom Asset Class Benchmarks can be found in the appendix.

Arizona State Retirement SystemAsset Class Performance vs. Benchmark – Public Markets

June 30, 2017

Goal Met: Partially

11

1 Year Return 3 Year Return IRR Since Inception Inception Date

ASRS Private Equity 16.5% 10.5% 11.7% Oct-07Russell 2000 24.5% 6.0% 11.2%

Excess Return -8.0% 4.5% 0.5%

ASRS Private Opportunistic Equity2 20.8% 17.1% 23.1% Apr-11

ASRS Private Debt 13.0% 10.8% 11.5% Jul-12S&P/LSTA Leveraged Loan Index + 250 bps 12.3% 7.0% 7.2%

Excess Return 0.7% 3.8% 4.3%

ASRS Opportunistic Debt2 16.1% 5.8% 9.9% Jan-08

ASRS Real Estate 11.4% 12.9% 8.5% Oct-05NFI - ODCE Index 7.8% 11.3% 7.3%

Excess Return 3.6% 1.6% 1.2%

ASRS Farmland and Timber 1.4% 3.2% 3.1% Jul-13CPI ex-Food and Energy + 350 bps 5.6% 5.6% 5.6%

Excess Return -4.2% -2.4% -2.5%

ASRS Total Infrastructure 9.5% -- 7.7% Dec-14CPI ex-Food and Energy + 350 bps 5.6% -- 5.6%

Excess Return 3.9% 2.1%


1Performance of private markets portfolios and corresponding benchmarks is reported on a one quarter lag. Performance shown as of March 31, 2017.2Net absolute rate of return expectations range from 10-14% per annum.Note: Due to the drawdown nature of private markets portfolios in which the investment managers call capital over time, dollar-weighted performance,or internal rate of return (IRR), is a more appropriate measure of the performance of ASRS private markets portfolios.

Arizona State Retirement SystemAsset Class Performance vs. Benchmark – Private Markets1

June 30, 2017

Goal Met: Partially

12

Cash Management

June 30, 2017


• Objective #4: Ensure sufficient monies are available to meet pension benefits, health insurance, member refunds, administrative payments, and other cash flow requirements.

*Includes assetized & unassetized cash balances (Inception of 1/26/15); represents monies to be used for funding needs that occur in subsequent month(s). Generally, monthly pension payments occur on the first day of month.

Goal Met: Yes

Month External CFs Last day of the Month Ending Balance*

Jun - 16 ($62.9) $274.6

Jul – 16 ($150.5) $512.3

Aug – 16 ($147.7) $467.9

Sep - 16 ($73.2) $209.5

Oct – 16 ($102.1) $436.3

Nov – 16 ($99.9) $663.2

Dec - 16 ($79.8) $620.1

Jan – 17 ($115.9) $538.0

Feb – 17 ($106.1) $455.0

Mar – 17 ($69.8) $72.3

Apr – 17 ($108.3) $420.5

May – 17 ($83.2) $375.5

Jun - 17 ($78.0) $58.4

13

Note: The information contained herein is for comparison purposes only and is not a Total Fund benchmark. Peer universe comparisons are subject to several limitations, including: peer groups are not comprehensive; several funds are included in multiple peer groups; peer groups are constructed using net of fee returns; and survivorship bias in that poorly performing funds may no longer report results.Universes are constructed using net of fee returns; therefore, ASRS rank is based on net of fee returns.Rankings are from highest (1) to lowest (100) in the InvestorForce Public Funds > $1 Billion Net Universe.The InvestorForce Public Funds > $1 Billion Net Universe contains 65 observations for the period ending June 30, 2017, with total assets of $555.6 billion.Composition of Interim SAA Policy can be found in the appendix.

Total Fund vs. InvestorForce Public DB > $1B Net (USD) (peer)1 Year

Arizona State Retirement SystemTotal Fund Risk Statistics vs. Peer Universe

June 30, 201714



June 30, 2017


15



June 30, 2017


16



June 30, 2017


17

Independent Oversight/ComplianceNote: All of the data shown on the following pages is as of June 30, 2017 and reflects the deduction of investment manager fees, unless otherwise noted.

18

Total Equity 58.5%

Total Fixed

Income 26.9%

58%

25%

12%

Total Inflation-Linked11.5%

Current Allocation

Interim SAAP

1Domestic Equity, International Equity and Public Markets Fixed Income market values include residual values remaining in terminated manager accounts.2Values shown for private markets portfolios include cash flows that occurred during 2Q 2017.3Aggregate Opportunistic asset classes not to exceed 10%.4Assetized Cash market value is allocated according to policy benchmark in Assetized Cash.

Note: Interim SAA Policy includes proration of 3% Private Debt which is unfunded.

Policy Ranges shown are relative to the long-term SAAP and may cause some asset classes to be out of range while implementation of the long-term SAAP is in process.

Market values include manager held cash.

Arizona State Retirement SystemSAA Policy Compliance

June 30, 2017

Current Mkt ValueCurrent

Allocation Interim SAAPInterim SAAP

Difference Policy Range Within Range SAAP

Total Domestic and International Equity $18,412,950,398 49.5% 50% -0.5% 50%Equity Risk Factor Portfolio $683,134,278 1.8% 0% 1.8% 0%

Domestic Equity1 $9,047,063,398 24.3% 26% -1.7% 16% - 36% Yes 26%U.S. Large Cap $6,845,817,067 18.4% 20% -1.6% 20%

U.S. Mid Cap $941,022,999 2.5% 3% -0.5% 3%U.S. Small Cap $1,034,466,417 2.8% 3% -0.2% 3%

Public Opportunistic Equity 3 $202,259,876International Equity1 $8,681,266,554 23.3% 24% -0.7% 14% - 34% Yes 24%

Developed Large Cap $6,634,102,499 17.8% 17% 0.8% 17%Developed Small Cap $518,792,042 1.4% 2% -0.6% 2%

Emerging Markets $1,510,493,575 4.1% 5% -0.9% 5%

Private Equity2 $3,078,583,555 8.3% 8% 0.3% 6% - 10% Yes 8%Private Opportunistic Equity2,3 $294,245,897 0.8% 0% 0.8% 0%

Total Equity $21,785,779,851 58.5% 58% 0.5% 48% - 65% Yes 58%

Public Markets Fixed Income1,4 $4,802,754,123 12.9% 16% -3.1% 13%Treasuries Long Duration $0 0.0% 0% 0.0% 0% - 10% Yes 0%

Interest Rate Sensitive 4 $3,910,343,008 10.5% 14% -3.5% 11%High Yield $892,411,115 2.4% 2% 0.4% 2%

Private Debt2 $3,776,626,142 10.1% 9% 1.1% 8% - 12% Yes 12%Opportunistic Debt2,3 $1,413,893,307 3.8% 0% 3.8% 0%

Total Fixed Income $9,993,273,572 26.9% 25% 1.9% 18% - 35% Yes 25%

Commodities $422,578,534 1.1% 2% -0.9% 0% - 4% Yes 2%Real Estate2 $3,331,111,110 9.0% 10% -1.0% 8% - 12% Yes 10%Infrastructure2 $356,466,647 1.0% 0% 1.0% 0% - 3% Yes 0%Farmland and Timber2 $187,020,397 0.5% 0% 0.5% 0% - 3% Yes 0%Opportunistic Inflation-Linked3 $0 0.0% 0% 0.0% 0%

Total Inflation-Linked $4,297,176,688 11.5% 12% -0.5% 10% - 16% Yes 12%

Multi-Asset Class Strategies $1,135,547,538 3.1% 5% -1.9% 0% - 12% Yes 5%

Operating Cash (Non Assetized)4 $6,850 0.0% 0%Total $37,211,784,499 100% 100% 100%

19

Asset Class Performance Summary - Public MarketsArizona State Retirement System

June 30, 2017

Market Value ($)

% of Portfolio

3 Mo (%) Rank YTD

(%) Rank 1 Yr (%) Rank 3 Yrs

(%) Rank 5 Yrs (%) Rank 10 Yrs

(%) Rank Inception (%) Since

Total Fund 37,211,784,499 100.0 3.2 -- 8.2 -- 13.9 -- 5.7 -- 9.6 -- 5.6 -- 9.7 Jul-75Interim SAA Policy 2.9 -- 7.8 -- 14.0 -- 4.8 -- 8.8 -- 5.2 -- 9.5 Jul-75Over/Under 0.3 0.4 -0.1 0.9 0.8 0.4 0.2 Actual Benchmark 2.9 -- 7.6 -- 13.3 -- 4.9 -- 9.1 -- 5.1 -- -- Jul-75

Total Domestic and International Equity1 18,372,052,616 49.4 4.4 53 11.2 79 18.9 83 5.7 41 11.6 48 5.3 19 6.9 Jan-98ASRS Custom Total Equity Benchmark 4.5 45 11.4 68 20.0 63 6.0 25 11.9 19 5.4 16 6.3 Jan-98Over/Under -0.1 -0.2 -1.1 -0.3 -0.3 -0.1 0.6 InvestorForce Public DB > $1 Billion Total Equity Net Median 4.4 11.9 20.6 5.4 11.6 4.9 6.3

Total Domestic Equity 9,023,693,237 24.2 2.6 79 7.8 75 17.3 93 9.1 18 14.6 20 7.7 3 11.2 Jul-75ASRS Custom Domestic Equity Benchmark 2.8 68 8.2 73 18.6 67 9.5 4 14.9 5 7.6 4 11.3 Jul-75Over/Under -0.2 -0.4 -1.3 -0.4 -0.3 0.1 -0.1 InvestorForce Public DB > $1 Billion US Equity Net Median 2.9 8.6 19.0 8.5 14.3 7.0 11.2 Jul-75

Total International Equity 8,663,738,933 23.3 6.4 48 15.1 70 20.9 43 1.4 86 7.6 83 1.2 68 6.1 Apr-87ASRS Custom Int'l Equity Benchmark 6.3 52 15.0 71 21.3 36 1.6 73 8.0 61 1.8 42 5.8 Apr-87Over/Under 0.1 0.1 -0.4 -0.2 -0.4 -0.6 0.3 InvestorForce Public DB > $1 Billion Global ex-US Equity Net Median 6.4 15.5 20.5 2.4 8.4 1.6 6.1 Apr-87

Total Public Markets Fixed Income 4,785,226,502 12.9 1.7 62 2.8 84 2.2 78 2.5 59 2.6 76 4.9 65 8.1 Jan-00ASRS Custom Public Markets Fixed Income Benchmark 1.6 76 2.9 81 3.0 64 1.9 89 2.3 93 4.5 84 -- Jul-75Over/Under 0.1 -0.1 -0.8 0.6 0.3 0.4 InvestorForce Public DB > $1 Billion Fixed Income Net Median 1.7 3.9 4.7 2.7 3.3 5.4 8.1 Jul-75

Total Inflation-Linked Assets 422,578,534 1.1 -3.1 82 -4.9 86 -3.8 81 -15.0 89 -8.5 89 -- -- -5.1 Feb-10ASRS Custom Inflation-Linked Benchmark -3.0 78 -5.3 91 -6.5 89 -14.8 89 -9.2 90 -- -- -6.3 Feb-10Over/Under -0.1 0.4 2.7 -0.2 0.7 1.2 InvestorForce Public DB > $1 Billion Real Assets/Commodities Net Median 0.0 1.1 2.2 0.2 -0.2 5.4 Feb-10

Total Multi-Asset Class Strategies 1,135,547,538 3.1 -2.9 99 -1.4 99 8.8 22 -0.9 99 5.9 19 5.1 26 6.4 Jan-04Multi-Asset Class Strategies Custom Benchmark 0.2 77 0.3 94 0.5 99 0.2 86 6.0 7 3.6 91 5.3 Jan-04Over/Under -3.1 -1.7 8.3 -1.1 -0.1 1.5 1.1 InvestorForce Public DB > $1 Billion Global Tactical Net Median 1.1 5.1 6.9 1.7 4.8 4.7 5.8 Jan-04

Operating Cash (Assetized) 58,425,404 0.2 4.0 -- 9.0 -- 6.3 -- -- -- -- -- -- -- 2.3 Feb-15ASRS Cash Assetization Custom Benchmark 3.4 -- 7.9 -- 6.1 -- -- -- -- -- -- -- -0.3 Feb-15Over/Under 0.6 1.1 0.2 2.6

Note: Performance, ranks and medians are based on net of fee performance data. Rankings are from highest (1) to lowest (100) in the eVestment Universe.

Composition of Interim SAA Policy and ASRS Custom Asset Class Benchmarks can be found in the appendix.

1Performance of ASRS Total Domestic and International Equity includes the performance of the ASRS Domestic and International Equity asset classes and the Equity Risk Factor Portfolio with an inception date of 6/1/2013. NEPC began calculating Total Domestic and International Equity performance in January 2009. Monthly performance data from January 1998 - December 2008 was provided by State Street.

Universe shown for Total Public Markets Fixed Income includes all U.S. fixed income strategies and does not accurately represent the exposures of the ASRS Public Markets Fixed Income allocation, which has included allocations ranging from 10% - 25% to emerging markets debt historically.

20

Arizona State Retirement SystemAsset Class Performance Summary - Private Markets

June 30, 2017

Market Value ($)

% of Portfolio

3 Mo (%)

1 Yr (%)

3 Yrs (%)

5 Yrs (%)

Inception (%)

Since

Total Fund 37,211,784,499 100.0 3.2 -- 13.9 -- 5.7 -- 9.6 -- 9.7 Jul-75Interim SAA Policy 2.9 -- 14.0 -- 4.8 -- 8.8 -- 9.5 Jul-75Over/Under 0.3 -0.1 0.9 0.8 0.2 Actual Benchmark 2.9 -- 13.3 -- 4.9 -- 9.1 -- -- Jul-75

Total Private Equity 3,060,336,302 8.2 2.6 16.5 10.5 12.3 11.7 Oct-07Russell 2000 1 QTR Lagged 2.0 24.5 6.0 10.7 11.2 Oct-07Over/Under 0.6 -8.0 4.5 1.6 0.5

Total Private Opportunistic Equity1 365,838,659 1.0 1.8 20.8 17.1 23.8 23.1 Apr-11

Total Private Debt 3,463,208,462 9.3 3.2 13.0 10.8 -- 11.5 Jul-12S&P/LSTA Leveraged Loan Index + 250 bps 1 QTR Lagged 1.8 12.3 7.0 -- 7.2 Jul-12Over/Under 1.4 0.7 3.8 -- 4.3

Total Opportunistic Debt1 1,417,457,417 3.8 3.1 16.1 5.8 7.8 9.9 Jan-08

Total Real Estate 3,374,016,228 9.1 2.2 11.4 12.9 13.1 8.5 Oct-05NCREIF ODCE 1 QTR Lagged (net) 1.9 7.8 11.3 11.2 7.3 Oct-05Over/Under 0.3 3.6 1.6 1.9 1.2

Total Farmland and Timber 188,514,052 0.5 0.5 1.4 3.2 -- 3.1 Jul-13CPI ex-Food and Energy + 350 bps 1 QTR Lagged 1.3 5.6 5.6 -- 5.6 Jul-13Over/Under -0.8 -4.2 -2.4 -- -2.5

Total Infrastructure 356,466,647 1.0 6.1 9.5 -- -- 7.7 Dec-14CPI ex-Food and Energy + 350 bps 1 QTR Lagged 1.3 5.6 -- -- 5.6 Dec-14Over/Under 4.8 3.9 -- -- 2.1

1Net absolute rate of return expectations range from 10-14% per annum.

Note: Performance in private markets asset classes is based on net of fee dollar-weighted performance data.

Composition of Interim SAA Policy can be found in the appendix.

Performance of private markets portfolios and corresponding benchmarks is reported on a one quarter lag. Performance shown as of June 30, 2016. Performance data and market values provided by State Street.Prior to 3Q 2012, performance of the Total Private Debt and Total Opportunistic Debt asset classes was reported in aggregate. Effective 6/30/2012, the Fund's allocations to Private Debt and Opportunistic Debt were separated and will be reported separately going forward.

Due to the drawdown nature of private markets portfolios in which the investment managers call capital over time, dollar-weighted performance, or internal rate of return (IRR), is a more appropriate measure of the performance of ASRS private markets portfolios.

21

Note: Performance is reported net of fees.Underlying composites do not add up to 100% because the chart excludes private market composites.Ranks for statistics shown above are based on the respective universe against which the portfolio is ranked on the asset class performance summary that precedes this section of the analysis.Rankings are from highest (1) to lowest (100) in the eVestment Universe.Composition of Interim SAA Policy and ASRS Custom Benchmarks can be found in the appendix.

3 Years Ending June 30, 2017

% of Tot Anlzd Ret Rank Anlzd StdDev Rank Tracking

Error Rank Info Ratio Rank Anlzd AJ Rank Beta SharpeRatio

_

Total Domestic and InternationalEquity 49.4% 5.7% 41 10.4% 26 0.6% 1 -0.5 81 -0.1% 66 1.0 0.5

ASRS Custom Total EquityBenchmark -- 6.0% 25 10.7% 80 -- -- -- -- -- 63 -- 0.5

Total Domestic Equity 24.2% 9.1% 18 10.4% 16 0.5% 9 -0.9 80 -0.2% 27 1.0 0.9

ASRS Custom DomesticEquity Benchmark -- 9.5% 4 10.6% 41 -- -- -- -- -- 12 -- 0.9

Total International Equity 23.3% 1.4% 86 12.2% 78 0.9% 3 -0.2 98 -0.2% 96 1.0 0.1

ASRS Custom Int'l EquityBenchmark -- 1.6% 73 12.5% 88 -- -- -- -- -- 91 -- 0.1

Total Public Markets FixedIncome 12.9% 2.5% 59 3.0% 53 0.9% 22 0.7 11 0.8% 47 0.9 0.8

ASRS Custom Public MarketsFixed Income Benchmark -- 1.9% 89 3.2% 61 -- -- -- -- -- 85 -- 0.5

Total Inflation-Linked Assets 1.1% -15.0% 89 13.8% 90 2.3% 15 -0.1 65 0.0% 58 1.0 -1.1

ASRS Custom Inflation-LinkedBenchmark -- -14.8% 89 13.4% 85 -- -- -- -- -- 58 -- -1.1

Total Multi-Asset ClassStrategies 3.1% -0.9% 99 7.3% 97 6.2% 79 -0.2 22 -1.1% 53 1.2 -0.2

Multi-Asset Class StrategiesCustom Benchmark -- 0.2% 86 3.3% 1 -- -- -- -- -- 36 -- 0.0

Arizona State Retirement SystemPublic Market Asset Class Analysis

June 30, 201722

5 Years Ending June 30, 2017

% of Tot Anlzd Ret Rank Anlzd StdDev Rank Tracking

Error Rank Info Ratio Rank Anlzd AJ Rank Beta SharpeRatio

_

Total Domestic and InternationalEquity 49.4% 11.6% 48 9.7% 29 0.6% 1 -0.6 89 0.0% 84 1.0 1.2

ASRS Custom Total EquityBenchmark -- 11.9% 19 9.9% 53 -- -- -- -- -- 84 -- 1.2

Total Domestic Equity 24.2% 14.6% 20 9.7% 17 0.5% 7 -0.5 72 0.0% 18 1.0 1.5

ASRS Custom DomesticEquity Benchmark -- 14.9% 5 9.9% 34 -- -- -- -- -- 20 -- 1.5

Total International Equity 23.3% 7.6% 83 11.4% 78 0.8% 3 -0.6 98 -0.3% 95 1.0 0.7

ASRS Custom Int'l EquityBenchmark -- 8.0% 61 11.6% 89 -- -- -- -- -- 92 -- 0.7

Total Public Markets FixedIncome 12.9% 2.6% 76 3.5% 66 0.7% 20 0.5 70 0.3% 85 1.0 0.7

ASRS Custom Public MarketsFixed Income Benchmark -- 2.3% 93 3.4% 60 -- -- -- -- -- 95 -- 0.6

Total Inflation-Linked Assets 1.1% -8.5% 89 12.6% 89 2.3% 16 0.3 54 0.8% 54 1.0 -0.7

ASRS Custom Inflation-LinkedBenchmark -- -9.2% 90 12.4% 85 -- -- -- -- -- 61 -- -0.8

Total Multi-Asset ClassStrategies 3.1% 5.9% 19 7.5% 96 4.9% 69 0.0 7 -1.2% 57 1.2 0.8

Multi-Asset Class StrategiesCustom Benchmark -- 6.0% 7 4.9% 6 -- -- -- -- -- 28 -- 1.2

Note: Performance is reported net of fees.Underlying composites do not add up to 100% because the chart excludes private market composites.Ranks for statistics shown above are based on the respective universe against which the portfolio is ranked on the asset class performance summary that precedes this section of the analysis.Rankings are from highest (1) to lowest (100) in the eVestment Universe.Composition of Interim SAA Policy and ASRS Custom Benchmarks can be found in the appendix.

Arizona State Retirement SystemPublic Market Asset Class Analysis

June 30, 201723

Arizona State Retirement SystemAsset Class Analysis - Total Domestic and International Equity

June 30, 201724

Arizona State Retirement SystemAsset Class Analysis - Total Domestic Equity

June 30, 201725

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26

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Arizona State Retirement SystemAsset Class Analysis - Total International Equity

June 30, 201728

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Arizona State Retirement SystemAsset Class Analysis - Total Public Markets Fixed Income

June 30, 201731

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Arizona State Retirement SystemAsset Class Analysis - Total Inflation-Linked Assets

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June 30, 201735

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Arizona State Retirement SystemAsset Class Analysis - Total Multi-Asset Class Strategies

June 30, 201737


June 30, 201738


June 30, 201739

• Nine Asset Class Committee meetings have been held since the last time we provided an update on the ASRS Asset Class Committee Meetings.

• March 17, 2017 – Combined Public and Private Markets Committee– Private Debt manager commitment ($200mm commitment)

• Incremental commitment to an existing manager• Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-

Investment Selection and Oversight• Committee approved the recommendation

– Private Debt manager guidelines variance recommendation• Fixed Income team recommended a change to investment criteria for an existing manager• Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


• March 23, 2017 – Combined Public and Private Markets Committee– Public and private markets monthly report review and deal flow discussion– Real Estate manager recommendation ($90mm)

• Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


– Real Estate manager recommendation ($150mm) • Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


Asset Class Committee MonitoringArizona State Retirement System

June 30, 2017

40

• March 23, 2017 – Combined Public and Private Markets Committee (continued)– Private Equity manager recommendation ($75mm)



– Private Equity manager recommendation ($100mm) • Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


• April 27, 2017 – Combined Public and Private Markets Committee– Public and private markets monthly report review and deal flow discussion

• Fund monitoring and strategic review of equity program– Private Equity manager recommendation ($100mm)



– Real Estate manager recommendation ($150mm) • Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-



June 30, 2017

41

• April 27, 2017 – Combined Public and Private Markets Committee (continued)– Private Debt manager recommendation ($150mm)

• Incremental commitment to an existing manager• Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


• May 17, 2017 – Combined Public and Private Markets Committee– Public and private markets monthly report review and deal flow discussion

• Fund monitoring and strategic review of equity program– Private Debt manager recommendation to new manager ($350mm)



– Opportunistic Debt manager recommendation to new manager ($200mm) • Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


– Private Debt manager recommendation ($90mm) • Incremental commitment to an existing manager• Consistent with strategic plan at the Total Fund level • Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-



June 30, 2017

42

Asset Class Committee Monitoring

June 30, 2017


• May 30, 2017 – Combined Public and Private Markets Committee– Public and private markets monthly report review and deal flow discussion– Real Estate manager guidelines variance recommendation

• Fixed Income team recommended a change to investment criteria• Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


– Real Estate manager guidelines variance recommendation• Fixed Income team recommended a change to investment criteria• Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


• June 9, 2017 – Combined Public and Private Markets Committee– Public Equity program recommendation

• Staff recommendation to restructure public equity program• Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-


• June 30, 2017 – Combined Public and Private Markets Committee– Public and private markets monthly report review and deal flow discussion– Public Equity program manager recommendation

• Outside consultant reviewed public equity trading program and Staff made recommendations to restructureportions of the program

• Committee approved the recommendation

43

• July 31, 2017 – Combined Public and Private Markets Committee– Real Estate monthly report review and deal flow discussion– Real Estate manager recommendation

• Due diligence process was followed in accordance with SIP 006 – Investment Manager, Partner, and Co-Investment Selection and Oversight


• August 3, 2017 – Combined Public and Private Markets Committee– Real Estate manager recommendation ($200mm)


• Committee approved the recommendation– Real Estate manager recommendation ($100mm)



Asset Class Committee Monitoring

June 30, 2017


44

• The Fund continues to make significant progress moving the portfolio from the Interim SAAP toward the long-term SAAP.

– Current Interim SAAP includes proration of 3.0% unfunded Private Debt. Interim SAAP Private Debt allocation raised to 12% effective 4/1/2017.

– Interim SAAP has achieved SAAP weight in Real Estate and Public Equity as of Q3 2016.– Continued build out of private markets asset classes provides opportunity to take advantage of illiquidity

premium to produce expected returns in excess of what we believe can be achieved in the public markets.

• The active manager Public Equity program has contributed negatively to performance over the past five years.

– Recent restructure of internally managed accounts focuses on an enhanced index approach.

• The Fixed Income program has contributed positively to performance over the past five years.– $2.2 billion in remaining commitments to private debt strategies equates to approximately 15% (NAV +

unfunded) of Total Fund assets vs. the SAAP target of 12%.

• Real Estate and Private Equity programs have contributed positively to performance over the past five years.

• Current tactical positioning is consistent with IMD House Views.

General ObservationsArizona State Retirement System

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Independent Oversight/Compliance: LTDNote: All of the data shown on the following pages is as of June 30, 2017 and reflects the deduction of investment manager fees, unless otherwise noted.

46

1Cash includes money for the upcoming monthly pension distribution.

Note: Market values include manager held cash.

ASRS LTD rebalanced to the new SAA Policy in February 2016, with an effective date of 2/18/2016.

June 30, 2017

Arizona State Retirement SystemLong Term Disability SAAP Policy Compliance

Total Equity 59.5%

Total Fixed Income 27.1%

61%

26%

13%

Total Inflation-Linked11.6%

Current Allocation

LTD SAA Policy

Current Mkt ValueCurrent

Allocation LTD SAAP Difference

U.S. Equity $66,352,843 35.5% 36.0% -0.5%U.S. Large Cap $41,128,834 22.0% 24.0% -2.0%U.S. Small Cap $25,224,009 13.5% 12.0% 1.5%

International Equity $45,012,401 24.1% 25.0% -0.9%Developed Large Cap $31,941,899 17.1% 18.0% -0.9%Developed Small Cap $4,011,762 2.1% 2.0% 0.1%

Emerging Markets $9,058,739 4.8% 5.0% -0.2%

Total Equity $111,365,244 59.5% 61.0% -1.5%

U.S. Fixed Income $50,721,958 27.1% 26.0% 1.1%Core $36,315,886 19.4% 19.0% 0.4%

High Yield $14,406,072 7.7% 7.0% 0.7%

Total Fixed Income $50,721,958 27.1% 26.0% 1.1%

Real Estate $20,130,519 10.8% 11.0% -0.2%Commodities $1,663,068 0.9% 2.0% -1.1%

Total Inflation-Linked $21,793,587 11.6% 13.0% -1.4%

Cash1 $3,269,337 1.7% 0.0% 1.7%

Total $187,150,255 100.0% 100.0% 0.0%

47

1LTD SAA Policy composition can be found in the appendix.

Quarter 1 Year 3 Years 5 Years10

Years

SinceInception (July-02)

Long TermDisability 3.1% 12.3% 4.6% 8.8% 4.6% 6.5%

LTD SAA Policy1 3.2% 12.9% 4.6% 8.7% 5.0% 6.8%

Excess Return -0.1% -0.6% 0.0% 0.1% -0.4% -0.3%

Arizona State Retirement SystemLong Term Disability Performance Summary

June 30, 2017

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Market Environment Update and Outlook

49

• Second quarter GDP growth rate (advance estimate) is estimated at 2.6%.– Retail sales ended May at +4.2% on a YoY basis. In the same period last year the YoY growth rate was 1.6%.– Corporate profits (ended January) as a percent of GDP decreased slightly to 9.1% from 9.2% (in October) and remain

elevated relative to historical levels.– The inventory-to-sales ratio ended May flat at 1.4 and has remained relatively flat since early 2010. – The U.S. trade deficit declined by a meager 1.8% ended May as exports increased and imports decreased.

• The unemployment rate decreased to 4.4% in Q2 from 4.5% in Q1; U-6, a broader measure of unemployment, decreased to 8.6% during the second quarter from 8.9%.

• The Case-Shiller Home Price Index (ended May) increased to 190.6 from 185.5 in January and is at levels higher than that of pre-financial crisis levels of 150.9.

• Rolling 12-month seasonally-adjusted CPI saw a down-tick to 1.6% at the end of June from 2.4% at the end of March; Capacity Utilization marginally increased to 76.6% in Q2 from 76.4% in Q1.

• Fed Funds rate was increased +0.25% to a targeted range of 1.0% - to – 1.25%. The 10-year Treasury Yield (constant maturity) finished Q2 at 2.2% down from 2.5% in Q1.

• The Fed balance sheet decreased slightly during Q2 2017, while the European Central Bank balance sheet continues to increase.

– ECB held its benchmark refinance rate at 0%, deposit rates -0.4% and asset purchases at €60 billion per month of corporate and public securities

• S&P valuations increased slightly in Q2 remaining above the 10-year and long-term averages.– Cyclically adjusted Shiller PE ratio (29.7x) is above the long-term average of 16.7x and above the 10-year average of 23.0x.

Economic Environment

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Market Environment – Q2 2017 Overview

* As of 3/31/2017

June 30, 2017

Qtr. 1 Yr. 3 Yr. 5 Yr. 10 Yr.World Equity BenchmarksMSCI ACWI (Net) (USD) World 4.3% 18.8% 4.8% 10.5% 3.7%MSCI ACWI (Local) World (Local Currency) 3.1% 19.2% 7.6% 12.4% 4.3%Domestic Equity BenchmarksS&P 500 Large Core 3.1% 17.9% 9.6% 14.6% 7.2%Russell 1000 Large Core 3.1% 18.0% 9.3% 14.7% 7.3%Russell 1000 Growth Large Growth 4.7% 20.4% 11.1% 15.3% 8.9%Russell 1000 Value Large Value 1.3% 15.5% 7.4% 13.9% 5.6%Russell 2000 Small Core 2.5% 24.6% 7.4% 13.7% 6.9%Russell 2000 Growth Small Growth 4.4% 24.4% 7.6% 14.0% 7.8%Russell 2000 Value Small Value 0.7% 24.9% 7.0% 13.4% 5.9%International Equity BenchmarksMSCI ACWI Ex USA World ex-US 5.8% 20.5% 0.8% 7.2% 1.1%MSCI EAFE (Net) (USD) Int'l Developed 6.1% 20.3% 1.1% 8.7% 1.0%MSCI EAFE (Local) Int'l Developed (Local Currency) 2.7% 22.1% 7.0% 12.5% 2.0%S&P EPAC Small Cap Small Cap Int'l 8.9% 23.4% 5.9% 13.2% 3.6%MSCI EM Emerging Equity 6.3% 23.7% 1.1% 4.0% 1.9%Domestic Fixed Income BenchmarksBarclays Aggregate Core Bonds 1.4% -0.3% 2.5% 2.2% 4.5%Barclays US High Yield High Yield 2.2% 12.7% 4.5% 6.9% 7.7%BofA ML US HY BB/B High Yield 2.2% 11.2% 4.5% 6.7% 7.1%CSFB Levered Loans Bank Loans 0.8% 7.5% 3.5% 4.8% 4.2%BofA ML US 3-Month T-Bill Cash 0.2% 0.5% 0.2% 0.2% 0.6%Barclays US TIPS 1-10 Yr Inflation -0.4% -0.3% 0.3% 0.3% 3.6%Global Fixed Income BenchmarksCitigroup WGBI World Gov. Bonds 2.9% -4.1% -1.0% -0.2% 3.5%Barclays Global Aggregate Global Core Bonds 2.6% -2.2% -0.4% 0.8% 3.7%BC Global Credit Global Bonds 3.4% 2.2% 0.9% 2.8% 4.3%JPM GBI-EM Glob. Diversified Em. Mkt. Bonds (Local Currency) 3.6% 6.4% -2.8% -0.7% 4.0%JPM EMBI+ Em. Mkt. Bonds 2.4% 3.7% 4.8% 5.0% 7.2%Alternative BenchmarksBloomberg Commodity Index Commodities -3.0% -6.5% -14.8% -9.2% -6.5%Credit Suisse Hedge Fund Index Hedge Fund 0.8% 5.8% 1.6% 4.5% 3.2%HFRI FoF Conservative Fund of Hedge Funds 0.5% 5.3% 1.5% 3.6% 0.8%Cambridge PE Lagged* Private Equity 4.3% 17.8% 10.3% 12.7% 9.8%NCREIF ODCE Net Lagged* Real Estate 1.5% 7.4% 10.8% 10.9% 4.6%Wilshire REIT Index REIT 1.8% -1.7% 8.3% 9.3% 5.6%CPI + 2% Inflation/Real Assets 0.5% 3.7% 2.9% 3.3% 3.7%


51

Global Equity

• U.S. equities as measured by the S&P 500 posted moderate gains in the second quarter (+3.1%).

• Small cap stocks underperformed large cap stocks during the quarter, with the Russell 2000 Index returning 2.5% and the Russell 1000 Index returning 3.1%.

• International equities outperformed U.S. markets during the quarter, returning 5.8%, as measured by the MSCI ACWI ex-U.S. Index. Emerging markets returned 6.3% as measured by the MSCI Emerging Markets Index in U.S. dollar terms.

– Developed international markets returned 6.1% in USD terms, while in local currency terms returned 2.7% as measured by the MSCI EAFE Index.

Private Equity

• Capital commitment momentum continued in Q2 2017.

• Private equity fundraising totaled $121 billion in Q2 2017.– North America focused private equity funds raised $67.5 billion.– Asia focused private equity funds raised $18.2 billion.– Europe focused private equity raised $32.5 billion.

• Private equity dry powder continued its increase to $906 billion ended Q2 up from $842 billion ended Q1.

Market Environment

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52

Fixed Income

• The nominal yield curve continued to flatten in Q2. Intermediate –to- long term yields declined 4 –to- 18 basis points across five to 30 year treasury bonds while short term yields increased 10 –to- 27 basis points across terms under one year.

• The spread between two and 10 year rates decreased to 93 basis points from 113 basis points in Q2.

• Treasury Inflation-Protected Securities, or TIPS, returned -0.4% during the quarter, as measured by the BBg Barclays US TIPS 1-10 Yr Index.

• The BBg Barclays Long Duration Credit Index gained 4.70%.

• Long Treasuries gained 3.96% and investment-grade US corporate debt gained 1.4%.

• The BBg Barclays 1-3 year US Government/ Credit Index returned 0.31%. US high yield bonds gained 2.2% driven by tighter spreads.

• Emerging markets debt had moderate –to- strong gains. – US dollar-denominated debt, as measured by the JP Morgan EMBI Index, gained 2.4%; local

currency debt gained 3.6%, according to the JP Morgan GBI-EM BD Index.

Market Environment

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53

Real Assets/Inflation-Linked Assets

• Energy remains attractive despite volatile oil prices. – Private equity and debt opportunities are attractive.

– Fire sale prices never materialized but focusing on assets outside of the hottest zip codes provides potential for strong returns as market normalizes.

• Infrastructure – select opportunities to access growth markets. – High quality assets are receiving premium bids from direct investors (Pension Funds and Sovereigns)

with low costs of capital and long hold horizons; focus on mismanaged or niche opportunities.

• Metals & Mining – have commodity prices bottomed?– Peak capex occurred in 2012, lagging commodity price drops that began in 2011.

– Diverse demand drivers for underlying commodity prices.

• Timber – low return potential and limited opportunity for outperformance.

• Agriculture – near-term slowdown in price appreciation creates opportunity to invest in a strong (very) long term outlook supported by demographic trends.

Market Environment

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54

Commodities

• Commodities ended the quarter down 3.0% as measured by the Bloomberg Commodity Index.– Agricultural commodities and energy price weakness contributed to the quarter’s losses.

Real Estate

• NEPC continues to be neutral on core real estate in the US and remains positive on non-core real estate, that is, value-add and opportunistic strategies.

• Real estate fundamentals (rent growth, occupancy, net absorption) remain strong; however, valuations are high on an absolute and relative basis.

– Rising interest rates have been baked into existing valuations but excess cap rate expansion (beyond general expectations) will reset valuations.

• Overall, the non-core real estate investment environment in the U.S. is normalizing; however, select areas remain attractive.

• Europe is viewed as the best place for a marginal dollar of non-core real estate investment. – Current US-dollar denominated investors with currency exposure will feel near-term impact of Brexit,

but new investors may benefit from a strong US-dollar. Long-term Brexit and broader European political instability, however, are unclear.

Market Environment

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55

NEPC Insights• 2017 First Quarter Market Thoughts (April 2017)• The French Election – A Sigh of Relief (May 2017)• An Insight into a Goals-Based Asset Allocation Framework

(May 2017)• The Essential Guide to Third-Party Valuations for Hedge Fund

Investors (May 2017)• Market Chatter: What’s Next for Puerto Rico Bondholders?

(June 2017)• Are US Equities Falling out of Favor? (June 2017)

Highlights of Second Quarter Happenings at NEPCJune 30, 2017

Conference Recap• NEPC hosted its 22nd Annual Investment Conference in Boston

in May. This year’s agenda focused on the uncertainty and challenges facing investors today. Over 200 NEPC clients attended the panel discussions, keynote presentations and breakout sessions. Thank you to everyone who took time out of their schedules to make this conference our biggest and, according to our attendees, our best one yet! Check out some pictures from the event here: http://info.nepc.com/nepc-22nd-annual-investment-conference

Webinar Replays• NEPC’s 7th Annual Investment Manager Webinar (May 2017)

Recent Updates• Chief Investment Officer’s 6th annual list of

the world’s most influential investment consultants includes NEPC’s Allan Martin, Partner on the Public Funds team.

• Healthcare Financial Management Association (HFMA) has awarded NEPC’s Healthcare practice with the “Peer Reviewed by HFMA ®” designation.*

NEPC Gives Back • NEPC's Stacey Flier, CFA, Private Wealth

Senior Consultant, hosted an educational day to discuss the importance of education and preparing for future careers to a group of 7th grade girls that attend St. Andrew Nativity School, a college-prep middle school in Portland, OR, that provides education for low-income, primarily minority, students of all religious backgrounds.

• NEPC participated in the J.P. Morgan Corporate Challenge Series, a world-wide series of 3.5-mile running events open to groups from organizations within the business and public sectors in Boston. The Corporate Challenge is set up to be the world's greenest road race, and this year the race made a donation to the Boston Children's Hospital Trust.

To download NEPC’s recent insights and webinar replays, visit: www.NEPC.com/insights

*HFMA staff and volunteers determined that this business solution has met specific criteria developed under the HFMA Peer Review Process. HFMA does not endorse or guarantee the use of this business solution.

June 30, 2017


56

Appendix: SAA Policy History

57

• 7/1/75 – 12/31/79 – 40% S&P 500/60% Barclays Capital Aggregate



• 1/1/92 – 12/31/94 – 50% S&P 500/10% MSCI EAFE/40% Barclays Capital Aggregate




• 10/1/03 – 12/31/06 – 53% S&P 500/15% MSCI EAFE/ACWI ex-U.S.1/26% Barclays Capital Aggregate/6% NCREIF ODCE (lagged one quarter)

• 1/1/07 – 10/31/2009 – 31% S&P 500/7% S&P 400/7% S&P 600/18% MSCI ACWI ex-U.S./5% Russell 2000 (lagged one quarter)/26% Barclays Capital Aggregate/6% NCREIF ODCE (lagged one quarter)

• 11/1/2009 – 6/30/2012 – 28% S&P 500/6% S&P 400/6% S&P 600/13% MSCI EAFE/2% MSCI EAFE Small Cap/3% MSCI Emerging Markets/7% Russell 2000 (lagged one quarter)/24% Barclays Capital Aggregate/2% Barclays Capital High Yield/6% NCREIF ODCE (lagged one quarter)/3% Dow Jones/UBS Commodities Index

• 7/1/2012 – 3/31/2015 – 23% S&P 500/5% S&P 400/5% S&P 600/14% MSCI EAFE/3% MSCI EAFE Small Cap/6% MSCI Emerging Markets/7% Russell 2000 (lagged one quarter)/13% Barclays Capital Aggregate/5% Barclays Capital High Yield/4% JP Morgan GBI-EM Global Diversified/3% S&P/LSTA Levered Loan Index + 250 basis points (lagged one quarter)/8% NCREIF ODCE (lagged one quarter)/4% Dow Jones/UBS Commodities Index

• 4/1/2015 – 3/31/2017 – 20% S&P 500/3% S&P 400/3% S&P 600/17% MSCI EAFE/2% MSCI EAFE Small Cap/5% MSCI Emerging Markets/8% Russell 2000 (lagged one quarter)/11% Barclays Capital Aggregate/4% Barclays Capital High Yield/10% S&P/LSTA Levered Loan Index + 250 basis points (lagged one quarter)/10% NCREIF ODCE (lagged one quarter)/2% Bloomberg Commodities Index TR/5% Multi-Asset Class Custom Index

• 4/1/2017 - present – 20% S&P 500/3% S&P 400/3% S&P 600/17% MSCI EAFE/2% MSCI EAFE Small Cap/5% MSCI Emerging Markets/8% Russell 2000 (lagged one quarter)/11% Barclays Capital Aggregate/2% Barclays Capital High Yield/12% S&P/LSTA Levered Loan Index + 250 basis points (lagged one quarter)/10% NCREIF ODCE (lagged one quarter)/2% Bloomberg Commodities Index TR/5% Multi-Asset Class Custom Index

• *Interim SAA Policy: 20% S&P 500/3% S&P 400/3% S&P 600/17% MSCI EAFE/2% MSCI EAFE Small Cap/5% MSCI Emerging Markets/8% Russell 2000 (lagged one quarter)/14% Barclays Capital Aggregate/2% Barclays Capital High Yield/9% S&P/LSTA Levered Loan Index + 250 basis points (lagged one quarter)/2% Bloomberg Commodity Index/5% Multi-Asset Class Custom Index/10% NCREIF ODCE (lagged one quarter)

• Note: Interim SAA Policy includes proration of 3% Private Debt which is unfunded. Recently approved Strategic Asset Allocation Policy effective April 1, 2017.

1MSCI EAFE/ACWI ex-U.S. Benchmark is the MSCI EAFE Index prior to 10/1/2005 and the MSCI ACWI ex-U.S. thereafter.

Note: All MSCI indices changed from Gross to Net dividend withholding taxes effective 1/1/2014.

Arizona State Retirement SystemStrategic Asset Allocation Policy (SAAP) History

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58

• ASRS Custom Total Equity Benchmark was 77% S&P 500, 23% MSCI EAFE through 12/31/1999; 76% S&P 500, 24% MSCIEAFE through 9/30/2003; 78% S&P 500, 22% MSCI EAFE/ACWI ex-U.S.1 through 12/31/2006; 49% S&P 500, 11% S&P 400, 11%S&P 600, 29% MSCI ACWI ex-U.S. through 10/31/2009; 48% S&P 500, 10% S&P 400, 10% S&P 600, 23% MSCI EAFE, 4% MSCIEAFE Small Cap, 5% MSCI Emerging Markets through 6/30/2012; 41% S&P 500, 9% S&P 400, 9% S&P 600, 25% MSCI EAFE, 5%MSCI EAFE Small Cap, 11% MSCI Emerging Markets through 3/31/2015; 40% S&P 500, 6% S&P 400, 6% S&P 600, 34% MSCIEAFE, 4% MSCI EAFE Small Cap, 10% MSCI Emerging Markets thereafter.

• ASRS Custom Domestic Equity Benchmark was S&P 500 through 12/31/2006; 74% S&P 500, 13% S&P 400, 13% S&P 600through 12/31/2010; 70% S&P 500, 15% S&P 400, 15% S&P 600 through 3/31/2015.; 77% S&P 500, 11.5% S&P 400, 11.5%S&P 600 thereafter.

• ASRS Custom International Equity Benchmark was MSCI EAFE through 9/30/2005; MSCI ACWI ex-U.S. through 12/31/2010;72% MSCI EAFE, 11% MSCI EAFE Small Cap and 17% MSCI Emerging Markets through 6/30/2012; 61% MSCI EAFE, 13% MSCIEAFE Small Cap and 26% MSCI Emerging Markets through 3/31/2015; 71% MSCI EAFE, 8% MSCI EAFE Small Cap and 21% MSCIEmerging Markets thereafter.

• ASRS Custom Public Markets Fixed Income Benchmark was Barclays Capital U.S. Aggregate Index through 12/31/2010; 93%Barclays Capital U.S. Aggregate Index, 7% Barclays Capital U.S. High Yield Bond Index through 12/31/2012; 59% Barclays CapitalU.S. Aggregate Index, 23% Barclays Capital U.S. High Yield Bond Index, 18% JP Morgan GBI-EM Global Diversified through3/31/2015; 73% Barclays Capital U.S. Aggregate Index, 27% Barclays Capital U.S. High Yield Bond Index through 3/31/2017;85% Barclays Capital U.S. Aggregate Index, 15% Barclays Capital U.S. High Yield Bond Index thereafter.

• ASRS Custom Inflation-Linked Benchmark was 100% Barclays Capital U.S. TIPS through 7/31/2010; 50% Barclays CapitalU.S. TIPS, 50% Bloomberg Commodity Index through 8/31/2010; 30% Barclays Capital U.S. TIPS, 70% Bloomberg CommodityIndex through 5/31/2011; 100% Bloomberg Commodity Index thereafter.

• Multi-Asset Class Strategies Custom Benchmark was 56% S&P 500, 16% MSCI EAFE, 28% Barclays Capital Aggregatethrough 9/30/2011; 50% S&P 500, 19% MSCI EAFE, 28% Barclays Capital Aggregate, and 3% Bloomberg Commodity Indexthrough 06/30/2012; 43% S&P 500, 25% MSCI EAFE, 28% Barclays Capital Aggregate, and 4% Bloomberg Commodity Indexthrough 3/31/2015; market value weighted average of the benchmarks for Bridgewater (91 Day T-Bill) and Windham (52% MSCIACWI net, 30% Citi WGBI, 9% DJ US REIT, and 9% Bloomberg Commodities Index) thereafter.

Arizona State Retirement SystemASRS Custom Asset Class Benchmark History


Note: All MSCI indices changed from Gross to Net of dividend withholding taxes effective 1/1/2014.

June 30, 2017

59

• ASRS Custom Small Cap Equity Blended Benchmark was the Russell 2000 Index through 12/31/2006; S&P 600 Indexthereafter.

• DFA Blended Benchmark was the Russell 2000 Value Index through 12/31/2006; S&P/Citigroup 600 Value Index thereafter.

• ASRS Custom Int’l Developed Markets Equity Index was MSCI EAFE through 9/30/2005; MSCI ACWI ex-U.S. through12/31/2010; 87% MSCI EAFE and 13% MSCI EAFE Small Cap through 6/30/2012; 82% MSCI EAFE and 18% MSCI EAFE Small Capthrough 3/31/2015; 89% MSCI EAFE and 11% MSCI EAFE Small Cap thereafter.

• Brandes Custom Benchmark was MSCI EAFE through 9/30/2005; MSCI ACWI ex-U.S. through 2/28/2011; MSCI EAFE thereafter.

• ASRS Cash Assetization Custom Benchmark is 33% S&P 500, 14% Russell 2000, 25% MSCI EAFE, 28% Barclays TreasuryIndex through 8/24/2015; 100% Barclays US Long Treasury Index through 11/13/2015; 15% S&P 500, 15% Russell 2000, 16% MSCI EAFE, 4% MSCI Emerging Markets Index, 50% Barclays US Treasury Index through 4/29/2016; 52% S&P 500, 18% Russell 2000, 30% Barclays US Long Treasury Index through 6/28/2016; 100% Barclays US Long Treasury Index through 9/15/2016; NYSE US 2 Year Treasury Futures Index through 12/21/2016; 30% S&P 500, 10% Russell 2000, 30% MSCI EAFE, 30% Barclays Treasury Index thereafter.

• ASRS Bridgewater Custom Benchmark was 56% S&P 500, 16% MSCI EAFE, 28% Barclays Capital Aggregate through 9/30/2011; 50% S&P 500, 19% MSCI EAFE, 28% Barclays Capital Aggregate, and 3% Bloomberg Commodity Index through 06/30/2012; 43% S&P 500, 25% MSCI EAFE, 28% Barclays Capital Aggregate, and 4% Bloomberg Commodity Index through 3/31/2015; Citigroup 3-Month Treasury Bill Index thereafter.

• Times Square Custom Benchmark was Russell 2500 Growth through 3/31/2015; Russell 2000 Growth thereafter.

ASRS Custom Asset Class Benchmark History

June 30, 2017




60

● 7/1/2002 – 12/31/2004 - 53% S&P 500/17% MSCI EAFE/30% Barclays Capital Aggregate Bond Index

● 1/1/2005 – 2/28/2007 - 53% Russell 3000/15% MSCI EAFE/26% Barclays Capital Aggregate Bond Index/6% DJ Wilshire Real Estate Securities Index

● 3/1/2007 – 12/31/2010 - 50% Russell 3000/18% MSCI EAFE/26% Barclays Capital Aggregate Bond Index/6% DJ Wilshire Real Estate Securities Index

● 1/1/2011 – 12/31/2012 - 40% Russell 1000/7% Russell 2000/13% MSCI EAFE/2% MSCI EAFE Small Cap/3% MSCI Emerging Markets/24% Barclays Capital Aggregate/2% Barclays Capital High Yield/6% DJ Wilshire Real Estate Securities Index/3% Bloomberg Commodity Index

● 1/1/2013 – 2/28/2016 - 34% Russell 1000/6% Russell 2000/14% MSCI EAFE/3% MSCI EAFE Small Cap/6% MSCI Emerging Markets/13% Barclays Capital Aggregate/8% Barclays Capital High Yield/4% JP Morgan GBI-EM Global Diversified/8% DJ Wilshire Real Estate Securities Index/4% Bloomberg Commodity Index

● 2/29/2016 – Present - 24% Russell 1000/12% Russell 2000/18% MSCI EAFE/2% MSCI EAFE Small Cap/5% MSCI Emerging Markets/19% Barclays Capital Aggregate/7% Barclays Capital High Yield/11% DJ Wilshire Real Estate Securities Index/2% Bloomberg Commodity Index

Arizona State Retirement SystemLong Term Disability Strategic Asset Allocation Policy (SAAP) History


June 30, 2017

61

Information Disclaimer

• Past performance is no guarantee of future results.

• All investments carry some level of risk. Diversification and other asset allocation techniques are not guaranteed toensure profit or protect against losses.

• NEPC’s source for portfolio pricing, calculation of accruals, and transaction information is the plan’s custodian bank.Information on market indices and security characteristics is received from other sources external to NEPC. While NEPChas exercised reasonable professional care in preparing this report, we cannot guarantee the accuracy of all sourceinformation contained within.

• Some index returns displayed in this report or used in calculation of a policy, allocation or custom benchmark may bepreliminary and subject to change.

• This report is provided as a management aid for the client’s internal use only. Information contained in this report doesnot constitute a recommendation by NEPC.

• This report may contain confidential or proprietary information and may not be copied or redistributed to any party notlegally entitled to receive it.

Reporting Methodology

• The client’s custodian bank is NEPC’s preferred data source unless otherwise directed. NEPC generally reconcilescustodian data to manager data. If the custodian cannot provide accurate data, manager data may be used.

• Trailing time period returns are determined by geometrically linking the holding period returns, from the first full monthafter inception to the report date. Rates of return are annualized when the time period is longer than a year. Performanceis presented gross and/or net of manager fees as indicated on each page.

• For managers funded in the middle of a month, the “since inception” return will start with the first full month, althoughactual inception dates and cash flows are taken into account in all Composite calculations.

• This report may contain forward-looking statements that are based on NEPC’s estimates, opinions and beliefs, but NEPCcannot guarantee that any plan will achieve its targeted return or meet other goals.

Information Disclaimer and Reporting Methodology

62

Agenda Item #7

Copyright © 2017 GRS – All rights reserved.


Experience Study Recommendations

October 27, 2017

Agenda

• Revisit Purpose of Experience Study

• Revisit Highlights of General Findings

– Outline of Changes from August

• Impact on Contributions

2

Purpose of Valuation

• The primary purpose of the annual actuarial valuation is to either (1) set or (2) assess the adequacy of the contribution policy – “Funding” or “contribution allocation procedure”

• The funding policy is the pattern of contributions, not necessarily the contribution in a given year

• For ASRS, the funding policy has contributions reset each year, with a 30 year laddered amortization approach, with contributions split evenly between members and employers

3

Purpose of Experience Study

• Actuarial assumptions and methods are utilized to develop each of the outputs of actuarial valuation process

• Experience Study is a regularly scheduled review of the assumptions and methods

– GFOA recommends at least once every five years

– ASRS’ last experience study was in 2013

• General process for setting assumptions and methods

– Actuary makes recommendations

– Board considers actuary’s recommendation and makes the final decision for the system

4

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 currently 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 should be updated for more recent information • Most other assumptions are reasonable or only need minor

modifications

5

Revisions since the August Meeting

• We have lowered the administrative expense assumption from 0.32% of payroll to 0.25% of payroll for the Plan to reflect the effort being made to decrease the administrative burden

• We have modeled the PBI expectations using a standard deviation closer to historical levels and without any loads for illiquidity or uncertainty – Creates a lower expected PBI over time

• We are recommending lowering the investment return assumption to 7.5% • We are recommending a 2.5% payroll growth (amortization growth)

assumption in the funding policy • Projections utilize actual rather than estimated FY 2017 investment results

6

0

20

40

60

80

100

6% Return 7% Return 8% Return

Pe

rce

nta

ge o

f B

en

efi

ts

Contributions Earnings

• This assumption is used to predict what percentage of a future benefit payments will be covered by investment return and what percentage by contributions.

• Lower Returns/Higher Contributions

7

Investment Return Assumption

Investment Return Assumption

• The assumption selected should be reasonable – Not necessarily a single “correct” answer

• Assumption is selected using a process that considers: – ASRS target asset allocation – Capital market expectations

Utilize a building block approach that reflects expected inflation, real rates of return, and plan related expenses

Take into account the volatility of the expected returns produced by the investment portfolio

• Other factors to consider – Historical investment performance – Comparison with peers

8

Per ASOP 27: Reasonable Assumptions

• An economic assumption is reasonable if – It is appropriate for the purpose of the measurement – It reflects the actuary’s professional judgement – It takes into account historical and current economic data that is

relevant as of the measurement date – It reflects the actuary’s estimate of future experience – It has no significant bias (i.e., it is not significantly optimistic or

pessimistic) Although some allowance for adverse experience may be appropriate

• The standard explicitly advises an actuary not to give undue weight to recent experience

9

Investment Return Assumption • The current assumption is 8.00%

– Currently represents the return, net of all administrative and investment expenses – Based on recent experience, the current assumption would equate to 8.11% gross

less 0.11% for administrative expenses = 8.00% net/net

• Recommend removing administrative expenses from return assumption – Required by new accounting rules – Makes comparisons consistent between funding actuarial results, accounting

actuarial results, and performance results – Takes pressure off of return assumption – Recommended assumption takes into account the current policy of reducing

administrative costs over the short term – Adds 0.25% of payroll to the required contribution for the ASRS Plan – Will be reset each year based on experience

10

Investment Return Assumption Comparison to Peers

“Recent Exp Studies” is the compilation from Systems that have performed experience studies in the last 24 months

11

Variation among survey responses may result from differences in portfolio structures.

What is the Right Time Horizon?

• Most sources of market expectations have a 7-10 year time horizon

• Some will argue that pension plans have an almost infinite time horizon and should only focus very long term

• While the time horizon for ASRS is much longer than 10 years, due to the impact of cash flows and the duration of the current liabilities, the applicable time horizon for the current liability is approximately 17-20 years for choosing an investment return assumption – 62% of current liabilities are for members already retired

12

Current Target Portfolio

Core Bonds, 11%

High Yield, 2%

Private Debt, 12%

US Public Equity, 26%

Non-US Public Equity, 24%

Private Equity, 8%

Commodities, 2%

Real Estate, 10%

Multi-Asset Strategies, 5%

13

Per NEPC’s June 2017 materials: 7.2% expected return over next 5-7 years 8.5% expected return over next 30 years

Capital Market Assumptions – Investment Consultants

• We performed the analysis on the target asset allocation

• Projected real returns were developed using ASRS’ target investment allocation and 2017 capital market return assumptions developed by eleven investment consulting firms and a broader survey: – 7 have 5-10 year time horizons

Average expected inflation of 2.28%

– 4 have 20 year time horizons Average expected inflation of 2.29%

– Horizon survey of 29 firms with 5-20+ year time horizons From before the election

14

Range of Expected Returns

Expected Compound Return

10 year survey – Nominal 6.8%

10 year survey – Real with 2.5% inflation 7.0%

NEPC – 5-7 Year for ASRS 7.2%

Horizons Survey (10 year) Nominal 7.2%

20+ year survey – Nominal 7.3%

20+ year survey – Real with 2.5% inflation 7.5%

Horizons survey (10 year) – Real with 2.5% inflation 7.5%

NEPC – 30 Year for ASRS 8.5%

15

Actuary’s Recommendation

• Based on this analysis, we recommend lowering the investment return assumption

– We recommend 7.50% which is closer to the expected return in our independent capital market analysis over a longer time horizon

16

PBI Assumption

• Arizona Revised Statute §38-767 outlines the provisions for providing what is termed a Permanent Benefit Increase (PBI) to retired members.

• Funds to pay for the PBI come from “excess earnings” on the actuarial value of the overall ASRS fund – If the 10 year return is above 8%, the excess is available for PBI

• This provision is not discretionary, it is a known formula • Once money is allocated into the EPBI, future adverse experience

can not reduce the amount • Historically, this has not been reflected in the actuarial liabilities or

contribution requirements

17

PBI Modeling

• Using stochastic modeling, and the historical standard deviation of the portfolio, we propose the following PBI assumptions based on the investment return assumption – The 8% PBI subtrahend is in statute at 8% and does not

decrease if the return assumption is decreased

18

Investment Return Assumption Derived PBI Assumption

8.00% 0.60% per year

7.75% 0.45% per year

7.50% 0.30% per year

Post-retirement mortality

• Nationally, life expectancies continue to improve

• Current assumption was set in 2013 experience study to be the 1994 Group Annuity Mortality Table projected forward to 2015

– Assumed mortality varies depending on the size of the annuitant’s benefit

• The current assumption is a “static” assumption, meaning the current assumption is used for all current and future retirees

• There has been a significant amount of activity on this assumption in the industry with new tables published as of 2014 (RP-2014), along with new sets of improvement scales

19

Post-retirement Mortality – Base Table

• We have developed a base mortality table using ASRS experience – 2017 State Retirees of Arizona (2017 SRA) – Separate tables for males and females – Mortality rates weighted by the size of the annuitant’s benefit

• We are recommending ASRS to use a fully generational approach to project future mortality improvement – With this fully generational projection approach, a gradual and consistent

improvement over time would be incorporated into the valuation process – Greatly diminishes the risk of having to have another large update to mortality in a

future experience study

• For the projected improvement assumption, we are recommending the ultimate rates of the most recently published improvement scales – Ultimate MP improvement rates (medium, don’t change annually)

20

Amortization Growth Policy

• The current amortization strategy calculates the same dollar amount for each of the 30 years in the schedule, called level dollar

• Many pension plans utilize some level of growth in their amortization schedule/strategy

• Example: a growth rate equivalent to the expected rate of payroll growth (level percent financing)

• Payments early in the pattern are lower, but it increases payments later

• In theory, the budget of the plan sponsor, and the payroll, should have grown so the actual relative burden is either the same or lower

21

Historical Payroll Growth

22

Valuation

Date

Annual Payroll

($'s in Millions)

Annual

Increase in

Payroll

Valuation

Date

Annual Payroll

($'s in Millions)

Annual

Increase in

Payroll

6/30/1993 $3,748 6/30/2005 $8,032 7.3%

6/30/1994 $4,126 10.1% 6/30/2006 $8,312 3.5%

6/30/1995 $4,432 7.4% 6/30/2007 $9,162 10.2%

6/30/1996 $4,632 4.5% 6/30/2008 $9,708 6.0%

6/30/1997 $4,836 4.4% 6/30/2009 $9,835 1.3%

6/30/1998 $5,164 6.8% 6/30/2010 $9,420 -4.2%

6/30/1999 $5,488 6.3% 6/30/2011 $9,061 -3.8%

6/30/2000 $5,894 7.4% 6/30/2012 $8,869 -2.1%

6/30/2001 $6,357 7.9% 6/30/2013 $8,753 -1.3%

6/30/2002 $6,989 9.9% 6/30/2014 $8,909 1.8%

6/30/2003 $7,297 4.4% 6/30/2015 $9,072 1.8%

6/30/2004 $7,486 2.6% 6/30/2016 $9,264 2.1%

Average Increase Since 6/30/1993 4.0%

Average Increase Last 20 Years 3.5%




0% Amortization Growth (Level Dollar)

15.7% 13.6%

13.2%

8.1%

0%

5%

10%

15%

20%

25%

30%

35%

Amortization Payment asa % of Payroll

Normal Cost

23

7.50% ROR, 0.30% PBI, Level Dollar scenario

Comparisons – Amortization Growth

6%

8%

10%

12%

14%

16%

18%

ER C

on

trib

uti

on

Rat

e

7.5% ROR, 0.30% PBI, 0.0% Growth

7.5% ROR, 0.30% PBI, 2.5% Growth

24

The 2.5% growth scenario starts lower and has a flatter slope than the 0% scenario

Other assumptions

• Overall, the other recommendations are small or immaterial

• Reviewed LTD assumptions – Update to a more up-to-date assumed recovery table – Utilize actual member data to value overpayments

instead of relying on assumptions – Reduce the assumption for future benefit offsets

• Full analysis is in the report

25

Illustrated Impact

Current Funding

Valuation

Current Accounting* Disclosures

New Assumptions 8.00% ROR 0.60% PBI

New Assumptions 7.50% ROR 0.30% PBI

(1) (2) (3) (5)

UAAL (millions) $10,343 $16,170 $13,253 $14,393

Funded Ratio 77.6% 68.0% 73.0% 71.3%

Estimated FY19 Contribution Rate

11.66% NA 12.61% 13.18%

Est FY19 using a 5 year phase in strategy

NA NA NA 11.64%

(Max of 12.94%)

26

• Impact on the total contribution rate for the Plan – Recalculated as of June 30, 2016 for illustration purposes – Does not include LTD Program

* Accounting disclosures based on market value of assets.

Items to consider when determining optimal

pattern of contributions • The assumptions only influence short term cost

• Actual experience will drive longer term costs

• Short term costs are predictable, longer term costs are unknown (risk)

• All active members pay the same contribution rate

• New members are not eligible for PBI and have other lower valued benefit provisions, however this will be partially offset by longer life expectancies

27

Discussion and Next Steps

• The Board needs to provide guidance and ultimately accept final assumptions to be used in the June 30, 2017 valuations to be delivered at the December Board meeting

28

Actuary’s Qualifications

• We believe the recommended set of actuarial assumptions should present a more accurate portrayal of ASRS’s financial condition and should reduce the magnitude of future experience gains and losses.

• The study was conducted in accordance with generally accepted actuarial principles and practices and with the Actuarial Standards of Practice issued by the Actuarial Standards Board

• All signing actuaries meet the Qualification Standards of the American Academy of Actuaries

29

Arizona State Retirement System Actuarial Experience Study As of June 30, 2016

October 18, 2017

Board of Trustees Arizona State Retirement System 3300 North Central Avenue, 14th Floor Phoenix, Arizona 85012 Subject: Results of 2017 Actuarial Experience Study

Members of the Board:

We are pleased to present our report on the results of the 2017 Actuarial Experience Study for the Arizona State Retirement System (ASRS). It includes our recommendations for new actuarial assumptions and methods to be effective for the June 30, 2017 actuarial valuation, and it describes the actuarial impact produced by these recommendations as though they had been effective for the June 30, 2016 actuarial valuation.

With the Board's approval of the recommendations in this report, we believe the actuarial condition of ASRS will be more accurately portrayed. The Board’s decisions should be based on the appropriateness of each recommendation, not on the collective effect on the contribution rate or the unfunded liability.

This study was conducted in accordance with generally accepted actuarial principles and practices, and with the Actuarial Standards of Practice issued by the Actuarial Standards Board. The signing actuaries are independent of the plan sponsor. Ryan Falls and Joe Newton are Enrolled Actuaries, Fellows of the Society of Actuaries, and Members of the American Academy of Actuaries and Paul Wood is an Associate of the Society of Actuaries and a Member of the American Academy of Actuaries. All three meet the Qualification Standards of the American Academy of Actuaries. Finally, each of the undersigned are experienced in performing valuations for large public retirement systems. We wish to thank the ASRS staff for their assistance in providing data for this study.

Respectfully submitted, Gabriel, Roeder, Smith & Company

R. Ryan Falls, FSA, EA, MAAA Joseph P. Newton, FSA, EA, MAAA

Senior Consultant Senior Consultant

Paul T. Wood, ASA, FCA, MAAA

Consultant


Table of Contents

Cover Letter

Section A Executive Summary

Section B Introduction

Section C Analysis of Experience and Recommendations

Section D Summary of Assumptions and Methods

Section E Summary of Data and Experience

SECTION A

EXECUTIVE SUMMARY


A-1

Summary of Recommendations

Our recommended changes to the current actuarial assumptions may be summarized as follows:

Economic Assumptions

1. We recommend decreasing the nominal investment return assumption from 8.00%. A rate of 7.50% is

close to the expected return in our independent capital market analysis over a longer time horizon. A rate

of 7.75% is close to the midpoint of the two sets of results provided by NEPC (7.2% short-term and 8.5%

long-term). Based on the much lower probability achieving the rate of return assumption over the shorter

term our preferred assumption would be 7.50%.

2. We recommend decreasing the inflation assumption from 3.00% to 2.30%.

3. We recommend a general wage inflation (GWI) assumption of 2.50%, made up of price inflation and

general productivity. This assumption is used primarily to index each cohort of new entrants used in the

projections and as a starting point for the payroll growth assumption (amortization payment growth rate).

4. We recommend a nominal annual salary increase assumption for long-service members of 2.70%, made

up of a 2.3% price inflation and a 0.40% for general productivity and individual merit and promotion.

5. We recommend a payroll growth assumption equal to the GWI assumption of 2.50%. This is the rate

amortization payments are anticipated to grow in the future.

6. The valuation currently assumes there will be no Permanent Benefit Increases (PBI) provided to retirees.

We recommend future PBI’s be reflected in the funding calculations at a rate of 0.30% per year in

conjunction with a 7.50% investment return assumption.

Mortality Assumptions

7. We recommend updating the post-retirement mortality tables for non-disabled retirees to reflect recent

ASRS member experience. We also recommend assuming that mortality rates will improve in the future

using a fully generational approach, but with the ultimate rates of the most recently published projection

scale (“U–MP”).

8. We recommend updating post-retirement mortality tables for disabled retirees to the most recently

published national tables, the RP-2014 tables for disabled lives. We also recommend assuming mortality

rates will improve in the future using a fully generational approach, but with the ultimate rates of the

most recently published projection scale (“U–MP”).

9. We recommend updating pre-retirement mortality tables for active employees to the most recently

published national tables, the RP-2014 tables for employees. We also recommend continuing to assume

mortality rates will improve in the future using a fully generational approach, but with the ultimate rates

of the most recently published projection scale (“U–MP”).


A-2

Other Demographic Assumptions

10. We recommend small adjustments in the overall termination rates consistent with ASRS member

experience and future expectations.

11. We recommend small adjustments in the overall retirement rates consistent with ASRS member

experience and future expectations.

12. We recommend small decreases to the disability patterns for members consistent with ASRS experience

and future expectations.

Actuarial Methods and Policies

13. We recommend continuing to use the asset smoothing method that recognizes each year’s gain or loss

over a closed 10 year period. However, we recommend a small modification to the method to allow for

direct offsetting of unrecognized gains and losses.

14. We recommend changing to the Entry Age Normal (EAN) actuarial cost method. Further, the normal cost

rate would be based on the benefits payable to each individual active member, sometimes referred to as

the “Individual” EAN actuarial cost method. The Projected Unit Credit (PUC) actuarial cost method is the

current funding method being used to allocate the actuarial costs of ASRS. The EAN actuarial cost method

will generally produce level contribution amounts for each member as a percentage of salary from year to

year, and allocates costs among various generations of taxpayers in a reasonable manner. It is by far the

most commonly used actuarial cost method for large public retirement systems and the method used for

accounting disclosures. Changing the method will produce more stability in the contribution rates from

year to year and allow for one set of liabilities to be used for funding and accounting purposes.

Assumptions Specific to the Long Term Disability Program

15. We recommend updating the recovery rates to the 2012 Group Long Term Disability Valuation Table

(2012 GLDT) as proposed by the Society of Actuaries’ Group Disability Experience Committee for use by

the National Association of Insurance Commissioners. Specifically, we recommend the rates applicable to

plans with a six-month elimination period, “Own Occupation” definition of disability, initial maximum

guaranteed benefit of $2,000 for active members and actual initial maximum guaranteed benefit for

current LTD recipients , “No Diagnosis” cause of disability, 15% margin for recovery, 27% margin for

deaths.

16. We recommend updating the offset methodology for current LTD recipients to assume members will have

a minimum offset of 30% within three years of initial receipt of LTD benefits. Offsets due to overpayments

will apply until the overpayments are expected to be fully recovered based on the data received from the

plan administrator.

17. We recommend updating the offset methodology for future LTD recipients such that the benefits, after all

applicable offsets, are 60% of the benefits before the offsets.


A-3

Cost Impact – Arizona State Retirement System (ASRS)

The following results are based on the valuation as of June 30, 2016. The new assumptions will first be effective for the June 30, 2017, valuation.

Amounts stated in millions

Current Assumptions New Assumptions Change

Investment Return 8.00% 7.50%

Assumption Set Current Proposed

PBI Treatment No PBI Pre-Fund PBI

Amortization Method Level dollar 2.5% Growth

Cost Method PUC EAN

Active Member - 401(a) 15,771$ 18,139$ 15.0%

Active Member - 401(h) 686 620 -9.6%

Retired, Inactive, and Other - 401(a) 28,764 30,475 6.0%

Retired, Inactive, and Other - 401(h) 884 920 4.1%

Total Accrued Liability 46,105$ 50,154$ 8.8%

Actuarial Value of Assets 35,762$ 35,762$ 0.0%

Unfunded Accrued Liability 10,343$ 14,393$ 39.2%

Funded Ratio 77.6% 71.3% -6.3%

Estimated Cont. Rate for FYE 2019 11.66% 13.18% 1.52%

Results as of June 30, 2016

SECTION B

INTRODUCTION

Arizona State Retirement System B-1

Introduction

A periodic review and selection of the actuarial assumptions is one of many important components of understanding and managing the financial aspects of the Arizona State Retirement System (ASRS). Use of outdated or inappropriate assumptions can result in: (1) understated costs which will lead to higher future contribution requirements or perhaps an inability to pay benefits when due; or, (2) overstated costs which place an unnecessarily large burden on the current generation of members, employers, and taxpayers. A single set of assumptions is typically not expected to be suitable forever. As the actual experience unfolds or the future expectations change, the assumptions should be reviewed and adjusted accordingly. It is important to recognize that the impact from various outcomes and the ability to adjust from experience deviating from the assumption are not symmetric. Due to compounding economic forces, legal limitations, and moral obligations, outcomes from underestimating future liabilities are much more difficult to manage than outcomes of overestimates. That asymmetric risk should be considered when the assumption set, investment policy and funding policy are created. As such, the assumption set used in the valuation process needs to represent the best estimate of the future experience of a retirement plan and be at least as likely, if not more than likely, to overestimate the future liabilities versus underestimate them. Using this strategic mindset, each assumption was analyzed and compared to the actual experience of ASRS and the general experience of other large public employee retirement systems. Changes in certain assumptions and methods are suggested, based upon this comparison, to remove any bias that may exist and to perhaps add in a slight margin for future adverse experience where appropriate. Next, the assumption set, as a whole, was analyzed for consistency and to ensure that the projection of liabilities was reasonable and consistent with historical trends. The following report provides our recommended changes to the current actuarial assumptions. Summary of Process In determining liabilities and contribution rates for retirement plans, actuaries must make assumptions about the future. Among the assumptions that must be made include: • Retirement rates • Mortality rates • Turnover rates • Disability rates • Disability recovery rates • Investment return rate • Salary increase rates • Inflation rate • Future Permanent Benefit Increases (PBIs) For some of these assumptions, such as the mortality rates, past experience provides important evidence about the future. For others, such as the investment return assumption, the link between past experience and future expectation is much weaker. In either case, actuaries should review the retirement plan’s


B-2

assumptions periodically and determine whether these assumptions are consistent with actual past experience and with future expectation. The last such actuarial experience investigation was performed covering a five-year period from July 1, 2007 to June 30, 2012. For this experience study, we have reviewed ASRS’ experience for the five-year period from July 1, 2011 through June 30, 2016. In conducting experience studies, actuaries generally use data over a period of several years. This is necessary in order to gather enough data so that the results are statistically significant. In addition, if the study period is too short, the impact of the current economic conditions may lead to misleading results. It is known, for example, that the health of the general economy can impact salary increase rates and withdrawal rates. Using results gathered during a short-term boom or bust will not be representative of the long-term trends in these assumptions. Also, the adoption of legislation, such as plan improvements or changes in salary schedules, will sometimes cause a short-term distortion in the experience. For example, if an early retirement window was opened during the study period, we would usually see a short-term spike in the number of retirements followed by a dearth of retirements for the following two-to-four years. Using a longer period prevents giving too much weight to such short-term effects. On the other hand, using a much longer period could obscure real changes that may be occurring, such as mortality improvement or a change in the ages at which members retire. In an experience study, we first determine the number of deaths, retirements, etc. that occurred during the period. Then we determine the number expected to occur, based on the current actuarial assumptions. The number of “expected” decrements is determined by multiplying the probability of the occurrence at the given age, by the “exposures” at that same age. For example, let’s look at a rate of retirement of 15% at age 55. The number of exposures can only be those members who are age 55 and eligible for retirement at that time. Thus they are considered “exposed” to that assumption. Finally, we calculate the A/E ratio, where "A" is the actual number (of retirements, for example) and "E" is the expected number. If the current assumptions were “perfect”, the A/E ratio would be 100%. When it varies much from this figure, it is a sign that new assumptions may be needed. (However, in some cases we prefer to set our assumptions to produce an A/E ratio a little above or below 100%, in order to introduce some conservatism.) Of course we not only look at the assumptions as a whole, but we also review how well they fit the actual results by gender, by age, and by service. If the data leads the actuary to conclude that new tables are needed, the actuary may "graduate" or smooth the results, since the raw results can be quite uneven from age to age or from service to service. Please bear in mind that, while the recommended assumption set represents our best estimate, there are other reasonable assumptions sets that could be supported. Some reasonable assumption sets would show higher or lower liabilities or costs. Section E Exhibits The exhibits in Section E should generally be self-explanatory. For example, on page E-7, we show an exhibit analyzing the termination rates by years of service. The second column shows the total number of members with 18 or fewer years of service who terminated during the study period. This excludes members who died, became disabled or retired. Column (3), labeled “Total Count” shows the total exposures of this group. This is the number of members who meet the criteria who could have terminated during any of the years. On this exhibit, the exposures exclude anyone eligible for unreduced retirement. A member is counted in


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each year they could have terminated, so the total shown is the total exposures for the five-year period. Column (4) shows the probability of termination based on the raw data. That is, it is the result of dividing the actual number of terminations (col. 2) by the number exposed (col. 3). Column (5) shows the new recommended termination rate. Column (6) shows the expected number of terminations based on the proposed termination assumptions. Column (7) shows the Actual-to-Expected ratios under the proposed termination assumptions.

SECTION C

ANALYSIS OF EXPERIENCE AND RECOMMENDATIONS

Arizona State Retirement System C-1

Analysis of Experience and Recommendations We will begin by discussing the economic assumptions: inflation, the investment return rate, the general wage increase assumption, the salary increase assumption for individuals, cost-of-living increases if applicable, and the payroll growth rate used for projecting total contributions. Then we will discuss the demographic assumptions: mortality, disability, termination and retirement. Finally we will discuss the actuarial methods used.

Actuarial Standards of Practice for Setting Economic Assumptions Actuarial Standards of Practice (ASOP) No. 27, Selection of Economic Assumptions for Measuring Pension Obligations, provides guidance to actuaries on giving advice on selecting economic assumptions for measuring obligations for defined benefit plans. ASOP No. 27 was revised and adopted by the Actuarial Standards Board (ASB) in September 2013. As no one knows what the future holds, it is necessary for an actuary to estimate possible future economic outcomes. Recognizing that there is not one right answer, the current standard calls for an actuary to develop a reasonable economic assumption. A reasonable assumption is one that is:

1. appropriate for the purpose of the measurement, 2. reflects the actuary’s professional judgment, 3. takes into account historical and current economic data that is relevant as of the measurement

date, 4. an estimate of future experience; an observation of market data; or a combination thereof, and 5. has no significant bias except when provisions for adverse deviation or plan provisions that are

difficult to measure are included. However, the standard explicitly advises an actuary not to give undue weight to recent experience. Each economic assumption should individually satisfy this standard. Furthermore, with respect to any particular valuation, each economic assumption should be consistent with every other economic assumption over the measurement period. Generally, the economic assumptions are much more subjective in nature than the demographic assumptions.

Inflation Assumption By “inflation,” we mean price inflation, as measured by annual increases in the Consumer Price Index (CPI). This inflation assumption underlies most of the other economic assumptions. It can impact investment return, salary increases, and overall payroll growth. The current annual inflation assumption is 3.00%. The following chart shows the average annual inflation, as measured by the increase in the Consumer Price Index (CPI-U), in each of the ten consecutive five-year periods over the last fifty years.


Source: Bureau of Labor Statistics, CPI-U, all items, not seasonally adjusted, Calendar Years

The table below shows the average inflation over various periods, ending December 2016.

Periods Ending Dec. 2016 Average Annual Increase in CPI-U

Last five (5) years 1.36%

Last ten (10) years 1.81%

Last fifteen (15) years 2.10%

Last twenty (20) years 2.12%

Last twenty-five (25) years 2.27%

Last thirty (30) years 2.64%

Since 1913 (first available year) 3.14%

Source: Bureau of Labor Statistics, CPI-U, all items, not seasonally adjusted

As you can see, inflation has been relatively low over the last twenty-five years and historically low over the past 10 years. Forecasts from NEPC (ASRS Investment Consultant) The ASRS’ Investment Consultant is currently assuming 2.50% over 5-7 years and 2.75% over 30 years.

4.55%

7.21%

10.06%

3.29%

4.53%

2.84% 2.18%

2.69% 2.26%

1.36%

0%

2%

4%

6%

8%

10%

12%

1967-1971

1972-1976

1977-1981

1982-1986

1987-1991

1992-1996

1997-2001

2002-2006

2007-2011

2012-2016

Average Annual Inflation CPI-U, Five-Year Averages

5-yr Avg. Increase


Forecasts from Other Investment Consulting Firms We examined the 2017 capital market assumption sets for eleven investment consulting firms and the average assumption for inflation was 2.29%, with a range of 2.00% to 2.75%. All but one of the investment consulting firms in our survey, in setting their capital market assumptions, currently assume that inflation will be 2.50% or less. We would like to point out that, for the first time in quite some number of years, the 2017 expectations for inflation are almost all higher than the 2016 expectations.

Expectations Implied in the Bond Market Another source of information about future inflation is the market for US Treasury bonds. Simplistically, the difference in yield between non-indexed and indexed treasury bonds should be a reasonable estimate of what the bond market expects on a forward looking basis for inflation. As of the end of April, the difference for 20-year bonds implies that inflation over the next twenty years would average 2.06%. The difference in yield for 30-year bonds implies 2.23% inflation over the next 30 years. The chart below shows the historical market implied inflation from January 1, 2003 through April 30, 2017.

However, this analysis is known to be imperfect as it ignores the inflation risk premium that buyers of US Treasury bonds often demand as well as possible differences in liquidity between US Treasury bonds and TIPS. Forecasts from Social Security Administration In the Social Security Administration’s 2017 Trustees Report, the Office of the Chief Actuary is projecting a long-term average annual inflation rate of 2.6% under the intermediate cost assumption. This remained unchanged form 2016 but two years prior, the Chief Actuary for the Social Security Administration reduced this assumption by 0.10% from the prior year and also narrowed the low cost and high cost scenarios to 2.0% and 3.2%, respectively.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Jan2003

Jan2004

Jan2005

Jan2006

Jan2007

Jan2008

Jan2009

Jan2010

Jan2011

Jan2012

Jan2013

Jan2014

Jan2015

Jan2016

Market Implied Inflation - US Treasury Bond Market

Implied Inflation 20-year Bonds Implied Inflation 30-Year Bonds


Survey of Professional Forecasters and Fed Policy The Philadelphia Federal Reserve conducts a quarterly survey of the Society of Professional Forecasters. Their most recent forecast (second quarter of 2017) was for inflation over the next ten years (2017 to 2026) to average 2.30%. This value has increased 0.20% in the last six months. Additionally, the Fed has openly stated that they have a target 2.00% inflation rate. Recommendation As a result, we find a reasonable range for this assumption to be 2.20% to 2.50% and we are recommending lowering the assumption to 2.30%. This change will bring the assumption closer to recent inflation levels and closer to the levels expected in the financial markets. As you will see, this change also affects the expectation for all other economic assumptions.

Investment and Administrative Expenses Since the trust fund pays expenses in addition to member benefits and refunds, we must develop an assumption about the level of future expenses. Almost all actuaries treat investment-related expenses as an offset to the investment return assumption. That is, the investment return assumption represents the expected return after payment of investment-related expenses. In regards to investment-related expenses, investment consulting firms periodically issue reports that describe their capital market assumptions. The estimates for core investments (i.e., fixed income, equities, and real estate) are generally based on anticipated returns produced by passive index funds that are net of investment-related fees. The investment return expectations for the alternative asset class such as private equity and hedge funds are also net of investment expenses. Therefore, we did not make any explicit adjustments to account for investment-related expenses. Some of the retirement plans may also employ active management investment strategies that result in higher investment expenses compared to strategies that invest in passive index funds. We have assumed that active management strategies would result in the same returns, net of investment-related expenses, as passive management strategies. On the other hand, there are a variety of acceptable approaches used to incorporate administrative expenses into the annual cost of a retirement plan. Some actuaries make an assumption that administrative expenses will be some fixed or increasing dollar amount. Others assume that the administrative expenses will be some percentage of the plan’s actuarial liabilities or normal cost. And others treat administrative expenses like investment expenses, as an offset to the investment return assumption. For ASRS, the practice has been to treat administrative expenses as an offset to the investment return assumption. That is, the investment return assumption for ASRS represents the expected return after payment of both administrative expenses and investment-related expenses. We are recommending that this practice be updated to explicitly add a load onto the annual normal cost. Using an explicit load onto the normal cost maximizes transparency, aligns better with the procedures promulgated by the Governmental Accounting Standards Board (GASB), and ensures a better parallel between the investment returns used by the investment consultant and the actuary.


The following table provides the actual administrative expenses as a percentage of covered payroll for the last five years.

Recommendation We recommend including an explicit assumption for administrative expenses with the normal cost and the annual contribution requirement. Based on a Board approved policy to lower administrative expenses over the next few fiscal years, we recommend assuming administrative expenses of 0.25% of covered payroll each year for the ASRS Plan.

Investment Return Rate The investment return assumption is one of the principal assumptions used in any actuarial valuation of a retirement plan. It is used to discount future expected benefit payments to the valuation date in order to determine the liabilities of the plans. Even a small change to this assumption can produce significant changes to the liabilities and contribution rates. Currently, it is assumed that future investment returns will average 8.00% per year, net of investment-related and administrative expenses. The chart below shows the annualized history of ASRS market returns for rolling periods ending December 31, 2016.

Fiscal YearTotal Admin.

ExpenseTotal Payroll

Percentage of

Payroll

2016 $26.3 million $9.1 billion 0.29%

2015 $29.8 million $8.9 billion 0.33%

2014 $29.8 million $8.8 billion 0.34%

2013 $37.0 million $8.9 billion 0.42%

2012 $35.2 million $9.1 billion 0.39%

2011 $31.2 million $9.4 billion 0.33%

Average $31.5 million $9.0 million 0.35%

Administrative Expenses

9.7%

7.2%

5.5%

9.2%

0%

2%

4%

6%

8%

10%

12%

Since 1975 20 10 5


For this assumption, past performance, even averaged over a twenty-five year period, is not a reliable indicator of future performance. The current asset allocation of the trust fund will significantly impact the overall performance, so returns achieved under a different allocation are not as meaningful. More importantly, the real rates of return for many asset classes, especially equities, vary so dramatically from year to year that even a twenty-five year period is not long enough to provide reasonable guidance. There are strong reasons to believe the next twenty-five years will be different than the last twenty-five, in large part because current bond yields are significantly lower than they were 25 years ago. Assumption Comparison to Peers We do not recommend the selection of an investment return assumption based on prevalence information. However, it is still informative to identify where the investment return assumption for ASRS is compared to its peers. The chart below shows the distribution of the investment return assumptions in the Public Fund Data as of February 2017. It is important to note that variation among survey responses may result from differences in portfolio structures, investment policies, funding policies, and risk tolerance.

We have included the same information from the 2011 survey to show the national trends in this assumption. The median rate of return is 7.50% and the average is 7.54%. However, the survey responses in 2017 do not tell the entire story. Several of the data points, including the one for ASRS, have not been examined in a few years, meaning even the current survey data is a little stale. The following chart includes a subset of the current survey that only includes systems that we can confirm have performed experience studies in the last 2 years:

Current Assumption for ASRS


As shown, for recent experience studies, the median assumption has been 7.25%. Asset Allocation We believe the most appropriate approach to selecting an investment return assumption is to identify expected returns given the funds’ target asset allocation mapped to forward-looking capital market assumptions. Below is a summary of the current asset allocations for ASRS

Core Bonds, 11%

High Yield, 2%

Private Debt, 12%

US Public Equity, 26%

Non-US Public Equity, 24%

Private Equity, 8%

Commodities, 2%

Real Estate, 10%

Multi-Asset Strategies, 5%


Per NEPC’s June 2017 materials, based on the allocation above, there is a 7.2% expected return over next 5-7 years and an 8.5% expected return over next 30 years. To validate the returns produced in the asset allocation study, we have utilized the forward-looking return expectations developed by several investment consulting firms and industry surveys. Within our direct GRS survey, four of the firms provide longer term expectations (15 years or longer). Based on the average of these four sets of expectations, and the recommended 2.30% inflation assumption, the expected compound return over the next 20 years under the portfolio is 7.30%, with a range of outcomes from 6.9% to 7.7%. Our survey also includes seven sets of expectations based on a 7 to 10 year time horizon. Based on the average of these sets of expectations, and the recommended 2.30% inflation assumption, the expected compound return over the next 10 years under the current portfolio is 6.8%, with a range of outcomes from 6.0% to 7.8%. Thus, much of the investment community is anticipating lower returns over the next decade compared to longer time frames. We have also compared these outcomes to a larger compendium of expectations by other investment consulting firms by utilizing a report issued by Horizon Actuarial Services, LLC (2016 Edition), which compiles and averages the return and risk forecasts of 29 major investment consulting firms. Based on the information, the survey produces expected compound return of 7.2%. Recommendation Based on this analysis, we recommend the Board reduce the investment return assumption to 7.50%. This would be closer to levels currently expected by a broad survey of investment professionals and the current ASRS portfolio. This would be comprised of a 5.20% real return, net of investment-related expenses, and a 2.30% inflation assumption.

Permanent Benefit Increase (PBI) Assumption Arizona Revised Statute §38-767 outlines the provisions for providing what is termed a Permanent Benefit Increase (PBI) to retired members. Funds to pay for the PBI come from “excess earnings” on the actuarial value of the overall ASRS fund if the 10 year return is above 8%. The excess returns are available for PBI. This provision is not discretionary; it is a known formula and once money is allocated, future adverse experience cannot reduce the amount. Historically, this provision has not been reflected in the actuarial liabilities or contribution requirements. Mathematically speaking, it is explicitly assumed that the investment return will be achieved each year in the current deterministic model. That is, there is no volatility of returns and, as a result, the current model will not produce “excess earnings.” History has shown that this not how the financial markets work. Even if the assumption is achieved over a longer term, there will be periods of over and under-performance, therefore, a PBI would most likely be payable.


The table below reinforces the point that since the PBI can only be positive it has to have a positive liability.

Actual Performance Subtrahend Difference Actual PBI

7% 8% -1% 0%

8% 8% 0% 0%

9% 8% 1% 1%

Views on PBI Type Provisions Within the Actuarial Community In the actuarial community, the PBI would be considered a “gain sharing” provision. Per a 2012 publication by the Society of Actuaries (https://www.soa.org/research-reports/2012/research-consider-eval/) [emphasis added]:

“Gain sharing is generally used to describe provisions of retirement programs that use investment earnings over a target level to provide additional benefits.”

For instance, benefits may be provided in a variety of forms including … permanently increased monthly payments … contingent on reserves set aside from these “excess earnings”.

“The term "excess earnings" is often criticized as misleading since it is expected that returns above the assumption will be needed to cover returns below the assumption in different years. The term is used here to describe the funds skimmed off to provide benefit increases.”

“gain sharing benefits should never be considered as a free benefit.” Actuarial Standards of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions, provides guidance on this issue. The following excerpts are taken form this standard [emphasis added].

3.5.3 Plan Provisions that are Difficult to Measure—Some plan provisions may create pension obligations that are difficult to appropriately measure using traditional valuation procedures. Examples of such plan provisions include the following:

a. gain sharing provisions that trigger benefit increases when investment returns are favorable but do not trigger benefit decreases when investment returns are unfavorable;

b. ….. For such plan provisions, the actuary should consider using alternative valuation procedures, such as stochastic modeling, option-pricing techniques, or deterministic procedures in conjunction with assumptions that are adjusted to reflect the impact of variations in experience from year to year. When selecting alternative valuation procedures for such plan provisions, the actuary should use professional judgment based on the purpose of the measurement and other relevant factors. The actuary should disclose the approach taken with any plan provisions of the type described in this section, in accordance with section 4.1(i). 4.1 Communication Requirements: and a description of any significant plan provisions not included in the actuarial valuation, along with the rationale for not including such significant plan provisions;

https://www.soa.org/research-reports/2012/research-consider-eval/


Furthermore, the Governmental Accounting Standards Board (GASB) has weighed in on these types of provisions. According to GASB Statement No. 67 [emphasis added]:

20. Projected benefit payments should include all pensions to be provided to employees in accordance with (a) the benefit terms and (b) any additional legal agreement(s) to provide pensions that are in force at the actuarial valuation date. Projected benefit payments should include the effects of automatic cost-of-living adjustments (COLAs) and other automatic postemployment benefit changes... 166. Automatic COLAs and other automatic postemployment benefit increases, such as automatic supplemental payments (for example, “thirteenth checks” and automatic gain-sharing features), are explicitly part of the terms of the pension plan and, therefore, constitute part of the employment exchange each period. Because automatic COLAs and similar postemployment benefit increases are part of the employment exchange, the Board believes that they are an integral part of an employer’s present obligation to its employees to provide pensions. Therefore, the effects of such automatic benefit changes should be included in the projection of benefit payments for accounting and financial reporting purposes.

As a result of this statement, the Net Pension Liability for ASRS that is disclosed in financial statements already includes an explicit assumption for PBI. PBI Analysis Using stochastic modeling and the standard deviation of the portfolio based on historical volatility, the PBI assumption would be expected to vary based on the nominal investment return assumption. The results of our modeling are summarized in the following table:

Investment Return Assumption Derived PBI Assumption

8.00% 0.60% per year

7.75% 0.45% per year

7.50% 0.30% per year

As shown, the lower the investment returns assumption, the lower the anticipated PBI assumption. Recommendation We recommend including an explicit assumption for the PBI. The level of the PBI assumption is dependent on the investment return assumption adopted, but the 0.30% would be consistent with the 7.50% investment return recommendation.

General Wage Inflation A General Wage Inflation (GWI) assumption represents the real wage growth over time in the general economy, or, is the assumption on how much the pay scales themselves will change year to year, not necessarily how much the pay increases received by individuals are, or even necessarily how the payroll in


total may change, which can be impacted by population changes, etc. This assumption should be applicable to a local economy, not necessarily one group inside a retirement plan. This assumption is used to index the pay of each group of new entrants used in the open group projections and as a starting point for individual salary increases and the payroll growth assumption. In an open group projection, projected terminations from the current active population are replaced with projected new entrants and this assumption would increase the starting salaries for each new group annually. The current valuation assumes an explicit GWI assumption of 3.0%. Because the long term salary scale and the payroll growth rate are set equal to the price inflation assumption, it can be derived that either (1) the previous price inflation assumption was actually the GWI assumption or (2) the previous assumption set assumed no real wage growth would occur compared to price inflation. Historically, General Wage Inflation has almost always exceeded price inflation. This is because wage inflation is in theory the result of (a) price inflation, and (b) productivity gains being passed through to wages. Since 1951, for the national economy as a whole, wage inflation has been about 1.00% larger than price inflation each year. For the last 10 years, for the national economy as a whole, wage inflation has been 2.67%, outpacing price inflation by about 0.61%. However, that spread will likely be viewed as overstated due to the historically low inflation during the past decade. Using data from 2007-2016, the average increase for ASRS members with 20+ years of service has been 2.17% per year, compared to the current 3.00% assumption. However, actual inflation during that period was 1.63% per year, meaning actual productivity/merit/promotion for this group was 0.54%, well above the 0.00% assumption. Recommendation We recommend a 0.20% real productivity growth assumption in addition to price inflation, or a nominal 2.50% GWI assumption.

Salary Increase Rates for Individuals In order to project future benefits, the actuary must project future salary increases. Salaries may increase for a variety of reasons:

Across-the-board increases for all employees;

Across-the-board increases for a given group of employees;

Increases to a minimum salary schedule;

Additional pay for additional duties;

Step or service-related increases;

Increases for acquisition of advanced degrees or specialized training;

Promotions;

Overtime;

Bonuses, if available; or

Merit increases, if available. Our salary increase assumption is meant to reflect all of these kinds of increases to the extent that they are included in the pay used to determine contributions or plan benefits.


The actuary should not look at the overall increases in payroll in setting this assumption, because payroll can grow at a rate different from the average pay increase for individual members. There are two reasons for this. First, when older, longer-service employees terminate, retire or die, they are generally replaced with new employees who have a lower salary. Because of this, in most populations that are not growing in size, the growth in total payroll is smaller than the average pay increase for members. Second, payroll can change due to an increase or decrease in the size of the group. Therefore, to analyze salary increases, we examine the actual increase in salary for each year and for each member who is active in two consecutive fiscal years. We looked at the salaries provided for all members who were active in the start and the end of an experience year, for the experience study period. The average increase over the experience period was 3.44%. Most actuaries recommend salary increase assumptions that include an element that depends on the member’s age or service, especially for large, state-wide retirement systems. They assume larger pay increases for younger or shorter-service employees. This is done in order to reflect pay increases that accompany changes in job responsibility, promotions, demonstrated merit, etc. The experience shows salaries continue to be more closely correlated to service (rather than age), as promotions and productivity increases tend to be greater in the first few years of a career, even if the new employee is older than the average new hire. For ASRS, the step-related portion is currently a one-dimensional table based on service. Thus, the individual salary increase assumption declines until one final ultimate salary increase assumption that will be used for all employees who have attained a specified amount of service. This ultimate salary increase assumption is currently 3.00% for employees with 20 or more years of service. The table below shows the actual average long-service increases over the study period. Note that this actual average rate of increase includes average actual inflation, not our inflation assumption.

The salary scale is composed of three pieces: price inflation, a productivity/merit component, and a service based step-rate or promotional piece. Our recommended price inflation assumption is 2.30%, as discussed earlier. The productivity/merit component would include the general productivity included in the GWI and any additional salary increase of the longer-service employees that is above the GWI (which could come from individual merit and promotions). The service-based or step-rate component is the expected salary increase of the shorter-service members that is above this level. All three pieces are assessed independently and then added together to develop the ultimate salary schedule. To determine the new salary scale, we first calculated the average increase over the study period for members grouped by service. Members with 20 or more years of service were selected to determine the productivity/merit component. They were grouped together because after than point the salary increase did not vary significantly with additional service. Using this group, we backed out actual inflation during the study period (1.63%) to get the real rates of increase. The average increase for the longer-service ASRS members over the study period was 2.17%;

Inflation ASRS

Average 1.63% 2.17%

Average “Long-Service” Increase

Actual Experience


therefore, the actual productivity/merit component for the period was 0.54% (2.17% less the actual inflation rate of 1.63%). The current assumption set has a productivity/merit component of 0.00%, so the experience has been higher than the assumption when measured on a real basis. However, much of this large productivity component is due to historically low inflation over the relatively short period and wages can take a while to reflect actual inflation, meaning pay increases are typically set over the short term based on expectations of inflation, not based on actual inflation. We recommend a 0.40% real productivity growth assumption in addition to price inflation, or a nominal 2.70% GWI assumption. Step Rate Component of Salary Scale Next, we developed the step-rate component. The following table shows the actual increases for members with less than 20 years of service and how we calculated the actual step-rates from the experience. Notice how the step rates decrease as the service increases.

The next step is to smooth these actual step-rates in order to develop a schedule that will produce a salary history consistent with the experience. To obtain the recommended rates, we add the smoothed step-rate component, the 2.30% inflation component, and the 0.40% productivity/merit component. Pages E-17 through E-18 include a detailed summary of the salary increase experience. Recommendation We recommend a 0.40% real productivity growth/merit assumption in addition to price inflation, or a nominal 2.70% annual increase for long-service members. Additionally, we recommend an updated step-rate table. The full schedule is shown in Section D of this report.

Years of ServiceAverage Pay

Increase

Less Actual Inflation

and Productivity

Components

Actual Step-Rate

Component

1 6.73% -1.63% 5.10%

2 5.54% -1.63% 3.90%

3 4.86% -1.63% 3.23%

4 4.46% -1.63% 2.83%

5 4.15% -1.63% 2.52%

6 3.87% -1.63% 2.24%

7 3.59% -1.63% 1.96%

8 3.27% -1.63% 1.64%

9 3.09% -1.63% 1.46%

10 3.07% -1.63% 1.44%

11 2.87% -1.63% 1.24%

12 2.83% -1.63% 1.20%

13 2.69% -1.63% 1.05%

14 2.56% -1.63% 0.93%

15 2.55% -1.63% 0.91%

16 2.51% -1.63% 0.88%

17 2.38% -1.63% 0.75%

18 2.20% -1.63% 0.57%

19 2.37% -1.63% 0.74%

Step-rate/Promotional Experience


Payroll Growth Rate The salary increase rates discussed above are assumptions applied to individuals. They are used in projecting future benefits. The GWI assumption above reflects how wages will change in the general economy. The GWI assumption is used in projections and to compare the reasonableness of the assumption set to national trends. There also may be an overall payroll growth assumption, currently 3.00%, in projecting aggregate payroll growth for a specific retirement system. In theory, payroll growth in the absence of membership growth should approximate the wage inflation assumption (proposed to be 2.50%). However, we may make adjustments based on the demographics of the individual population. The payroll growth rate is used in determining the contributions needed to amortize the unfunded actuarial accrued liability. The amortization payments may be calculated to be a level percentage of payroll, so as payroll increases over time, these contributions also increase. Thus, the amortization percentage is dependent on the rate at which payroll is assumed to increase. However, for a plan like ASRS with level dollar amortization strategy, the payroll growth assumption is not directly used. The best way to estimate this assumption is to produce an open group projection using all of the census data, the demographic assumptions, and the other wage assumptions, in order to project total payroll over the amortization period. We have performed open group projections, based on the proposed salary scales, demographic assumptions, and increasing the payroll for each cohort of new entrants by the 2.50% GWI assumption. These projections show that payroll will grow over the next couple of decades reasonably close to the 2.50% GWI assumption. Therefore, we are recommending a payroll growth assumption of 2.50%.

Actuarial Standards of Practice for Setting Demographic Assumptions Actuaries are guided by the Actuarial Standards of Practice (ASOP) adopted by the Actuarial Standards Board (ASB). One of these standards is ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations. This standard provides guidance to actuaries giving advice on selecting noneconomic assumptions for measuring obligations under defined benefit plans. We believe the recommended assumptions in this report were developed in compliance with this standard.

Post-Retirement Mortality Rates ASRS’ actuarial liabilities and contribution rates depend in large part on how long retirees live. If members live longer than expected, benefits will be paid for a longer period of time and the liability and ultimate contribution rates will be larger than expected. The mortality table currently being used for non-disabled retirees and for beneficiaries receiving benefits is the 1994 Group Annuity Mortality projected to 2015 with Projection Scale BB with adjustments for small and large benefit amounts. When choosing an appropriate mortality assumption, actuaries typically use standard mortality tables, unlike when choosing other demographic assumptions. They may choose to adjust these standard mortality tables, however, to reflect various characteristics of the covered group, and to provide for expectations of future mortality improvement (both up to and after the measurement date). If the plan population has sufficient credibility to justify its own mortality table, then the use of such a table also could be appropriate.


Factors that may be considered in selecting and/or adjusting a mortality table include the demographics of the covered group, the size of the group, the statistical credibility of its experience, and the anticipated rate of future mortality improvement. We first measured the credibility of the dataset to determine whether standard, unadjusted tables should be used or if statistical analysis of ASRS specific data was warranted. Based on a practice note issued by the American Academy of Actuaries in the Fall of 2011, a dataset needs 96 expected deaths for each gender to be within +/- 20% of the actual pattern with 95% confidence. We believe +/- 20% is a rather large range to be considered fully credible. Other sources state higher requirements, such as 1,000 deaths per gender. The following table gives the number of deaths needed by gender to have a given level of confidence that the data is +/- X% of the actual pattern.

Number of Deaths Needed for a Given Confidence Level

Confidence 99%-101% 97-103% 95%-105% 90%-110% 80%-120%

75% 4,543 505 182 45 11

80% 16,435 1,826 657 164 41

90% 27,060 3,007 1,082 271 68

95% 38,416 4,268 1,537 384 96

99% 66,358 7,373 2,654 664 166

Using this information, 1,082 deaths are needed by gender to have 90% confidence that the data is within

+/- 5% of the actual pattern. During the experience period, ASRS experienced 5,838 male and 6,815 female

retiree deaths, clearly indicating it is highly credible group.

For this analysis, we have weighted the analysis by the amount of the member’s monthly annuity. This is

consistent with the development of all national tables as data shows a clear correlation between income

and longevity. By weighting the data by annuity amounts, we are giving more weight to members who have

larger annuities (and thus have larger liabilities).

We begin by determining the expected number of deaths in each year at each age for males and females.

Then we compare the actual number to the expected number. The ratio of the actual deaths to the

expected deaths (the A/E ratio) tells us whether the assumptions are reasonable. When using a

generational approach for mortality improvement, an A/E of 100% is targeted. However, we will also focus

on the pattern across all ages and life expectancy created at individual ages when determining whether the

assumption is appropriate. We will discuss this in two parts, the recommended base mortality assumption,

and the recommended mortality improvement assumption.

Recommended Base Mortality Assumption

ASRS experience used to develop the base table was non-disabled retirees for the five-year period ending

June 30, 2016. We examined the fit of the standard, unadjusted industry tables first. The initial tables

considered were the RP-2014 Healthy Annuitant Tables for males and females. The overall actual to

expected ratios were 95% and 90%. Examining the data at specific ages showed that the actual to

expected ratios at young retiree ages were much less than 100% and older retiree ages were more than

100%. Due to this relationship, using the standard, unadjusted table would result in a poor measurement


of the plan’s liabilities. Since ASRS has enough experience to credibly model post-retirement mortality,

we have developed and recommended base mortality assumptions that are specific to ASRS.

To develop the recommended mortality assumptions, mortality rates for ages after 40 are grouped into 5

year age bands based on the actual ASRS’ experience and then an exponential model was applied to provide

a smooth fit to the experience. Mortality rates for ages under 40 are equal to the most recently published

RP-2014 mortality assumptions for healthy employees (adjusted back to the central point of the experience

period). The resulting actual-to-expected ratios for males and females are 102% and 101%, respectively.

The final step in the creation of the base mortality assumption was to project the preliminary table from the

center point of the analysis period (i.e., the year 2013) to the year 2017 using the mortality improvement

assumption. We will refer to this new table as the 2017 State Retirees of Arizona (2017 SRA) Mortality Table.

The following is a chart that shows the actual mortality experience assumption for females.

Another way to examine the best table is to compare the life expectancies created at various ages. The following table provides the life expectancies calculated from the given age based on the actual data, the current assumption, the RP 2014 published tables, and the recommended 2017 SRA tables.


As shown, using age 65 as the example, the current assumption was slightly overstating the life expectancy for the member. Moving to the normal form of the most recently published RP-2014 tables would have understated the life expectancy. We believe using client specific tables for a data set this size provides the most appropriate assumption as it will be fully reflective of geography, occupation, race, income, and other variables that can impact the mortality of a population. This is also a strategy that will also allow for small adjustments to the tables at each experience study instead of waiting 10-15 years for large adjustments each time a national table is published. Pages E-19 through E-20 include a detailed summary of the mortality experience. Recommended Mortality Improvement Assumption The current mortality assumption does not include the fully generational approach to projecting mortality improvement. Because of the use of static mortality assumptions, life expectancies for today’s younger active members are assumed to be the same as those of today’s retirees. As a result, the mortality assumption has to be reset at each experience study, creating UAAL and increased contributions. We recommend ASRS use a fully generational approach to project future mortality improvement. With this fully generational projection approach, a gradual and consistent improvement over time would be incorporated into the valuation process. Thus, the risk of having to have another large update to mortality in a future experience study is greatly diminished. There are currently three commonly discussed mortality improvement assumptions used by pension actuaries for valuating pension plan liabilities, each released by the Society of Actuaries. These mortality improvement assumptions include: Scale AA, Scale BB, and Scale MP (which has had three releases in 2014, 2015, and 2016). Scale AA is based upon a blend of mortality improvement trends among Civil Service Retirement System (CSRS) and Social Security Administration participants between 1977 and 1993. Since its official release in 1995, it has become the most widely adopted improvement scale for use by both public and private institutions within the United States. The Society of Actuaries’ Retirement Plans Experience Committee (RPEC) initiated a pension mortality study in 2010. At an early stage of its analysis, RPEC noticed that mortality experience since 2000 has improved at a faster rate than anticipated by Scale AA. As a result, RPEC issued another mortality improvement scale, Scale BB, in the year 2012 as an alternative mortality improvement assumption for pension actuaries to use. In October 2014, RPEC issued final reports of the mortality study that was originally initiated in 2010. These final reports included the release of another mortality improvement assumption, Scale MP-2014. A significant difference between the MP-2014 improvement scales and the prior improvement scales is that

Retiree

AgeActual in Data

Current

AssumptionRP 2014

Proposed

Table

60 24.5 24.6 24.1 24.5

65 20.2 20.5 20.1 20.2

70 16.2 16.7 16.3 16.2

75 12.5 13.3 12.8 12.5

80 9.3 10.2 9.7 9.3

Life Expectancy, in years – Male Healhty Annuitants


the MP tables are a two-dimensional improvement assumption that is a function of the age and calendar year, whereas prior scales were only a function of age. In 2015 and 2016, the RPEC issued updates to the mortality improvement assumption called Scale MP-2015 and Scale MP-2016. MP-2015 reflected an additional two years of mortality experience and MP-2016 reflected an additional three years of mortality experience. In both updates, rates of projection were materially decreased, meaning the original MP-2014 table was found to be too conservative. In addition, it has been stated that new projection scales are going to be published each year. After approximately 15 years, all three MP tables (MP-2014, MP-2015, and MP-2016) reflect the same improvement rate at each future calendar year (the ultimate mortality improvement rates). In order to balance the two objectives of reflecting the most recent data available, while maintaining stability of results from year to year, GRS is recommending the use of the ultimate mortality improvement rates in the MP tables for all years.

Disabled Mortality Rates

Because the rate of disability incidence is so low for the ASRS plans and the disabled mortality rates apply to a very small subsection of plan participants, this is a minor assumption that has little impact on the liabilities of ASRS. We recommend using the RP-2014 Disabled Mortality base table with future mortality improvements modeled using the ultimate mortality improvement rates in the MP tables.

Active Mortality Rates Active mortality is also a minor assumption. Incidence of active deaths is very low in comparison to terminations and retirements. For active mortality rates, we recommend using the RP-2014 mortality tables for healthy employees with future mortality improvements modeled using the ultimate mortality improvement rates in the MP tables.

Disability Rates For the current five-year experience period ending June 30, 2016, the experience noted that there were 2,476 total disabilities. The number of disabilities that occurred during the most recent experience period was slightly lower than currently assumed. As a result, we recommend a 7% reduction in the current disability assumption so that the new assumption will be consistent with the past 5 years of actual experience. Specifically, that the new assumption for disability rates will be 93% of the current assumed disability rates. Pages E-15 through E-16 include a detailed summary of the disability experience.

Retirement Rates

The valuation currently uses retirement rates that vary by age, service, and benefit tier group. The current assumptions for Tier 2 are estimates as no members in those groups are yet eligible to retire. Tier 2 members are generally assumed to follow similar patterns as Tier 1 members, but with some adjustments to account for their potentially later retirement eligibility (Rule of 80 versus 60/25 or 55/30). In general, there were slightly fewer retirements than expected, with a 98% actual to expected ratio. But, when analyzing the data, the current assumptions overstated the rates for members eligible for unreduced


retirement and understated the rates for those eligible for reduced retirement. The new base tables reflect that experience with actual to expected ratios around 99%. Pages E-1 through E-6 include a detailed summary of the retirement rate experience. The final schedules are shown in Section D of this report.

Termination Rates Termination rates reflect members who leave for any reason other than death, disability or service retirement. They apply whether the termination is voluntary or involuntary, and whether the member takes a refund or keeps his/her account balance on deposit in ASRS. The current termination rates are separated by sex, resulting in two distinct tables of termination rates. There is a strong correlation between age and service, and generally using both across all ages is not necessary. Using both the age and service indicates that the termination patterns are dependent on the member’s age at hire, or entry age. GRS looked at this entry age dependence, and found that there was material entry age dependence. It is not anticipated that the termination behavior will be vastly different between members hired before and after July 1, 2011 (who have different retirement eligibilities) and we recommend continuing to use the same termination tables for both tiers. GRS proposes using two service-based tables: one for employees hired at or before age 35, and one for employees hired after age 35. In analyzing this assumption, we have weighted the experience by salary, meaning instead of counting members and the number of members that terminate, we have summed the salary and the portion of the salary that terminates. Setting this assumption by counts can result in an assumption which will accurately predict the number of terminations, but result in gains or losses on liabilities each year. For example, a higher paid member has more liability than a lower paid member, and thus the termination pattern for the higher paid member will have more impact on the future liabilities of the plan. Also, higher paid members may be hired in to positions that have lower turnover versus lower paid members. The current assumptions produce an A/E ratio of 128% for employees with Entry Age At or Younger Than 35 and an A/E ratio of 107% for employees with Entry Age Older Than 35. The recommended assumptions bring the overall A/E ratios closer to 100% (106% and 105%, respectively) Pages E-7 through E-14 include a detailed summary of the termination rate experience. The final schedules are shown in Section D of this report.


LTD Plan Assumptions We recommend changing the disability incidence assumption to be consistent with the changes described above. That is, a 7% reduction in the current disability assumption so that the new assumption will be consistent with the past 5 years of actual experience. Specifically, that the new assumption for disability rates will be 93% of the current assumed disability rates. Currently, the disability recovery assumption is 150% of the 1987 Commissions’ Group Long Term Disability Valuation Table (1987 CGDT) applicable to plans with a six month elimination period. We are recommending updating this assumption to the 2012 Group Long Term Disability Valuation Table (2012 GLDT) as proposed by the Society of Actuaries’ Group Disability Experience Committee for use by the National Association of Insurance Commissioners. Specifically, the rates applicable to plans with a six-month elimination period, “Own Occupation” definition of disability, initial maximum guaranteed benefit of $2,000 for active members and actual initial maximum guaranteed benefit for current LTD recipients , “No Diagnosis” cause of disability, 15% margin for recovery, 27% margin for deaths. The current assumption for overpayments is based on a weighted average of 19 months of overpayments. We recommend that offsets due to overpayments will apply until the overpayments are expected to be fully recovered based on the data received from the plan administrator.

Other Assumptions and Refunds There are other assumptions made in the course of a valuation, such as the percentage of members who are married, the age difference between husbands and wives, the likelihood that a terminating employee will take a refund, etc. We have recommended what we believe to be the most reasonable assumption and have noted if these are new recommendation or a continuation of the current assumption. Spouse Age Difference We recommend maintaining the assumption that male members are three years older than their spouse and female members are three years younger than their spouse. Withdrawal of Employee Contributions Members that terminate with a vested benefit are assumed to choose the most valuable option available to them at the time of termination: withdrawal of contributions or deferred annuity. If the member is assumed to elect a refund option, then it is also assumed that the member forfeits the health insurance premium supplement. We assume that members who elect a single life annuity will receive accumulated benefit payments equal to their contributions after three years of being in receipt. We recommend maintaining this assumption. Future Retirees Eligible for the Health Insurance Premium Supplement It is assumed that 60% of future retirees will be eligible to receive the post-retirement health insurance premium supplement and that 40% of those retirees will be eligible for the dependent premium supplement. These assumptions also apply to members who have been retired less than one year. We recommend maintaining this assumption.


Beneficiary Characteristics 100% of members are assumed to be married. The husband is assumed to be three years older than the wife. We recommend maintaining this assumption. Optional Form Load A load of 0.174% has been added to the non-retired 401(a) liabilities to account for the election of optional forms other than a single life annuity. We recommend maintaining this assumption. Alternate Contribution Rate The past service contribution rate is adjusted to consider alternate contribution rate payments. We reduce the amortization amount by the anticipated amount of alternate contributions, and adjust for interest. We recommend maintaining this assumption. Adjustment for Contribution Timing Contribution rates are increased by ½ of a year’s interest to reflect the fact that contributions are made throughout the fiscal year and are further adjusted to reflect the one year lag. We recommend maintaining this assumption.

Actuarial Methods Actuarial Cost Method An actuarial cost method is a mathematical process for allocating the dollar amount of the total present value of plan benefits (TPV) between future normal costs and actuarial accrued liability (AAL). As previously prescribed by State statute, ASRS uses the Projected Unit Credit (PUC) actuarial cost method, where the TPV for an individual is allocated in proportion to accrued and future service at the valuation date. Essentially, the PUC method recognizes years of service when earned, but projects salary to retirement age. As such, the AAL for an individual member is generally equal to the TPV times the ratio of (i) the number of years of covered service on the date of the actuarial valuation, to (ii) the total expected covered service at retirement. Normal cost is generally equal to the increase in the AAL due to one additional year of service in the numerator of the ratio described above. The normal cost under PUC increases as a percentage of pay for an individual member from the date of hire to the date of retirement. This differs from the behavior of the normal cost under the Entry Age Normal (EAN) actuarial cost method (the most widely used actuarial cost method in the public sector) where the normal cost is expected to be level as a percentage of pay for a member’s entire career. However, it should be noted that PUC should produce a fairly consistent normal cost as a percentage of pay on a plan-wide basis whenever the average age and service of the active population remains fairly stable. Although EAN is the most widely used actuarial cost method in the public sector, PUC is still a commonly used method. We recommend changing to the actuarial cost method from PUC to EAN. EAN will generally produce level contribution amounts for each member as a percentage of salary from year to year, and allocates costs among various generations of taxpayers in a reasonable manner. It is by far the most commonly used actuarial cost method for large public retirement systems and the method used for accounting disclosures under GASB Statement No. 67. A change to the method will allow for the possibility of one set of liabilities to be used for funding and accounting purposes.


The change to actuarial cost method changes how costs are allocated between the Actuarial Accrued Liability (benefit obligations attributed to past service) and to the Future Normal Costs (benefit obligations attributed to future service), but the projected benefits and the funding trajectory of the plans do not change. Asset Valuation (Smoothing) Method The purpose of asset smoothing is to reduce short-term volatility in actuarial valuation results which are intended for long-term decision making and funding. Periods of poor returns are often followed by some amount of recovery or vice versa, and a market value (unsmoothed) approach, may result in overreaction to short-term market volatility. Currently, the actuarial value of assets is equal to the market value of assets less a ten-year phase-in of the Excess (Shortfall) between expected investment return and actual income on the market value of assets. We continue to believe this method is appropriate. It does not distinguish between types of return (interest, dividends, realized gains/losses, and unrealized gains/losses), like some other methods. It treats different asset classes and different investment styles the same. We do not believe the method has a bias relative to market. In other words, we expect the ratio of the AVA to MVA to average about 100% over the long term. We believe this method does a good job of smoothing asset gains and losses, and reduces fluctuations in the actuarial metrics. We recommend one enhancement to the current 10-year smoothing method. Specifically, if an offsetting gain or loss occurs in a future valuation, the proposed method would use the offsetting gain or loss to recognize the individual gains or losses more quickly. This method has the benefit of ensuring that any individual gain or loss is recognized in a reasonable timeframe, while eliminating the artificial volatility that is introduced from the more traditional asset smoothing methods.

SECTION D

SUMMARY OF ASSUMPTIONS AND METHODS

Arizona State Retirement System D-1

Summary of Assumptions and Methods Incorporating the Recommended Assumptions

The assumptions and methods will potentially be adopted by the Board of Trustees on

October 27, 2017, based on the Report on the Actuarial Experience Study covering a five-year period from July 1, 2011 to June 30, 2016, dated XXXX XX, XXXX.

I. Valuation Date The valuation date is June 30 of each plan year. This is the date as of which the actuarial present

value of future benefits and the actuarial value of assets are determined. II. Actuarial Cost Method

The actuarial valuation uses the Entry Age Normal actuarial cost method. Under this method, the employer contribution rate is the sum of (i) the employer normal cost rate, (ii) anticipated administrative expenses, and (iii) a rate that will amortize the unfunded actuarial liability.

Under the Entry Age Normal actuarial cost method, a calculation is made to determine the rate of contribution which, if applied to the compensation of each individual member during the entire period of anticipated covered service, would be required to meet the cost of all benefits payable on the member’s behalf. The salary-weighted average of these rates is the normal cost rate. This calculation reflects the plan provisions that apply to each individual member. The employer normal cost rate is equal to (i) the normal cost rate, minus (ii) the member contribution rate. The actuarial accrued liability is the difference between the total present value of future benefits and the actuarial present value of future normal costs. The unfunded actuarial accrued liability is the excess of the actuarial accrued liability over the actuarial value of assets.

III. Actuarial Value of Assets

The actuarial value of assets is based on the market value of assets with a ten-year phase-in of actual investment return in excess of (less than) expected investment income. Offsetting unrecognized gains and losses are immediately recognized, with the shortest remaining bases recognized first and the net remaining bases continue to be recognized on their original timeframe. Expected investment income is determined using the assumed investment return rate and the market value of assets (adjusted for receipts and disbursements during the year). The returns are computed net of investment-related expenses.

IV. Actuarial Assumptions

Investment Return: 7.50% per year, net of investment-related expenses (composed of an assumed 2.30% inflation rate and a 5.20% real rate of return) Administrative Expenses: The actual administrative expenses for the ASRS Plan are assumed to be 0.25% of payroll.


2 2 2

Salary Increases: A select-and-ultimate salary scale made up of a merit component and general salary increase component as follows:

Payroll Growth: 2.50% per year, compounded annually (for projecting valuation payroll). Decrement Timing: All decrements – mortality, service retirement, disability retirement, and termination of employment for reasons other than death or retirement – are assumed to occur at the middle of the valuation year. Mortality Decrements: Service Retirees, Beneficiaries, and Inactive Members

Rates are based on the 2017 State Retirees of Arizona (SRA) mortality table. Generational mortality improvements in accordance with the Ultimate MP scales and projected from the year 2017.

Disability Retirees Rates are based on the RP-2014 Disabled Retiree Mortality. Generational mortality improvements in accordance with the Ultimate MP scales are projected from the year 2014.

Active Members Rates are based on the RP-2014 Active Member Mortality table. Generational mortality improvements in accordance with the Ultimate MP scales are projected from the year 2014.

Years of Service Merit Component Total Salary Increase*

(1) (2) (3)

1 4.50% 7.20%

2 3.50% 6.20%

3 2.75% 5.45%

4 2.25% 4.95%

5 2.00% 4.70%

6 1.75% 4.45%

7 1.50% 4.20%

8 1.10% 3.80%

9 1.00% 3.70%

10 0.90% 3.60%

11 0.80% 3.50%

12 0.70% 3.40%

13 0.60% 3.30%

14 0.50% 3.20%

15 0.40% 3.10%

16 0.30% 3.00%

17 0.20% 2.90%

18 0.20% 2.90%

19 0.10% 2.80%

20 or more 0.00% 2.70%

*Total salary increase - wage inflation (or growth) rate (2.70%) + merit

component


3 3 3

Service Retirement Decrements: Rates at representative ages and years of service are shown below:

Age Non-disabled Disabled Employee Non-disabled Disabled Employee

20 0.000394 0.006899 0.000394 0.000157 0.002165 0.000157

25 0.000470 0.008224 0.000470 0.000168 0.002312 0.000168

30 0.000439 0.007680 0.000439 0.000212 0.002914 0.000212

35 0.000507 0.008887 0.000507 0.000278 0.003822 0.000278

40 0.000609 0.010670 0.000609 0.000384 0.005292 0.000384

45 0.000944 0.016533 0.000944 0.000637 0.008780 0.000637

50 0.001636 0.019789 0.001636 0.001069 0.011553 0.001069

55 0.002705 0.022675 0.002705 0.001623 0.014049 0.001623

60 0.004489 0.025814 0.004549 0.002369 0.016494 0.002369

65 0.007957 0.030744 0.008031 0.004912 0.020240 0.003586

70 0.014104 0.039148 0.013443 0.009209 0.027365 0.006122

75 0.024999 0.052675 0.022499 0.017263 0.039826 0.010448

80 0.044311 0.074340 0.037658 0.032361 0.059223 0.017834

2017 Rates of Mortality

Males Females

Age 5 10 15 20 25 30

50 6.0% 6.0% 6.0% 6.0% 6.0% 25.0%

55 7.0% 7.0% 7.0% 7.0% 20.0% 25.0%

60 10.0% 10.0% 10.0% 20.0% 15.0% 25.0%

62 15.0% 25.0% 25.0% 25.0% 25.0% 25.0%

65 30.0% 30.0% 30.0% 30.0% 30.0% 25.0%

70 25.0% 27.5% 25.0% 25.0% 25.0% 25.0%

75 27.5% 27.5% 27.5% 27.5% 27.5% 25.0%

80 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Sample Retirement Rates

For Members Hired Before July 1, 2011

Years of Service


4 4 4

Deferred vested members are assumed to retire at their normal retirement age.

Disability Retirement Decrements:

Sample rates for eligible members:

Age 5 10 15 20 25 30 35

50 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

55 7.0% 7.0% 7.0% 7.0% 7.0% 50.0% 90.0%

60 10.0% 10.0% 10.0% 10.0% 40.0% 65.0% 25.0%

62 15.0% 25.0% 25.0% 25.0% 40.0% 25.0% 25.0%

65 30.0% 30.0% 30.0% 30.0% 30.0% 25.0% 25.0%

70 25.0% 27.5% 25.0% 25.0% 25.0% 25.0% 25.0%

75 27.5% 27.5% 27.5% 27.5% 27.5% 25.0% 25.0%

80 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Sample Retirement Rates

For Members Hired On or After July 1, 2011

Years of Service

Age Unisex

20 0.0454

25 0.0502

30 0.0606

35 0.0925

40 0.1468

45 0.2271

50 0.3384

55 0.3970

60 0.4317

Annual Rates per 100 Members


5 5 5

Termination Decrements for Reasons Other Than Death or Retirement:

Termination rates for members not eligible for service retirement, based on years of completed service (rates are zero for members eligible for service retirement):

Withdrawal of Employee Contributions: Members that terminate with a vested benefit are assumed to choose the most valuable option available to them at the time of termination: withdrawal of contributions or deferred annuity. If the member is assumed to elect a refund option, then it is also assumed that the member forfeits the health insurance premium supplement. We assume that members who elect a single life annuity will receive accumulated benefit payments equal to their contributions after three years of being in receipt.

Future Retirees Eligible for the Health Insurance Premium Supplement: It is assumed that 60% of future retirees will be eligible to receive the post-retirement health insurance premium supplement and that 40% of those retirees will be eligible for the dependent premium supplement. These assumptions also apply to members who have been retired less than one year.

Beneficiary Characteristics: 100% of members are assumed to be married. The husband is assumed to be three years older than the wife.

Service Males Females Males Females

0 23.00% 24.30% 17.50% 21.10%

1 18.80% 20.00% 14.80% 17.40%

2 15.70% 16.90% 12.60% 14.60%

3 13.60% 14.70% 11.00% 12.60%

4 11.90% 13.00% 9.80% 11.10%

5 10.50% 11.70% 8.80% 9.90%

6 9.40% 10.50% 8.00% 8.80%

7 8.40% 9.50% 7.20% 7.90%

8 7.50% 8.60% 6.60% 7.10%

9 6.70% 7.80% 6.00% 6.40%

10 6.00% 7.00% 5.50% 5.70%

11 5.30% 6.40% 5.10% 5.10%

12 4.70% 5.80% 4.60% 4.60%

13 4.20% 5.20% 4.20% 4.10%

14 3.70% 4.70% 3.80% 3.60%

15 3.20% 4.20% N/A N/A

16 2.70% 3.70% N/A N/A

17 2.30% 3.30% N/A N/A

18 1.90% 2.90% N/A N/A

19 1.50% 2.50% N/A N/A

20+ 1.10% 2.10% N/A N/A

Annual Rates of Termination

Based on Years of Completed Service

Entry Age Less Thanor Equal to 35 Entry Age Greater Than 35


6 6 6

Census Data and Assets

The valuation was based on members of ASRS as of June 30, 2016 and does not take into account future members.

All census data was supplied by ASRS and was subject to reasonable consistency checks.

There were data elements that were modified for some members as part of the valuation in order to make the data complete. However, the number of missing data items was immaterial.

Asset data was supplied by ASRS.

Other Actuarial Valuation Procedures

No provision was made in this actuarial valuation for the limitations of Internal Revenue Code Sections 415 or 401(a)17.

Valuation payroll (earnings applied to the current valuation year) is the expected payroll for the fiscal year following the valuation date.

Optional Form Load – A load of 0.174% has been added to the non-retired 401(a) liabilities to account for the election of optional forms other than a single life annuity.

Alternate Contribution Rate – The past service contribution rate is adjusted to consider alternate contribution rate payments. We reduce the amortization amount by the anticipated amount of alternate contributions, and adjust for interest.

Adjustment for Contribution Timing – Contribution rates are increased by ½ of a year’s interest to reflect the fact that contributions are made throughout the fiscal year and are further adjusted to reflect the one year lag.

Future Permanent Benefit Increases (PBIs) – Future PBIs are assumed to be 0.30% per year.

IV. Assumptions Specific to the Long Term Disability Program

Assumptions Specific to the Long Term Disability Program

No provision was made in this actuarial valuation for the limitations of Internal Revenue Code Sections 415 or 401(a)17.

Termination of Claims in Payment due to Death or Recovery

2012 Group Long Term Disability Valuation Table (2012 GLDT) as proposed by the Society of

Actuaries’ Group Disability Experience Committee for use by the National Association of Insurance

Commissioners. Specifically, the rates applicable to plans with a six-month elimination period,

“Own Occupation” definition of disability, initial maximum guaranteed benefit of $2,000 for active

members and actual initial maximum guaranteed benefit for current LTD recipients , “No

Diagnosis” cause of disability, 15% margin for recovery, 27% margin for deaths.

Offsets for Disabled Members

The valuation assumes that the amounts reported as offsets (other than overpayment offsets) will

continue to apply to each member’s benefit until that benefit expires. For members within three

years of initial receipt of LTD benefits, benefit amounts are adjusted to reflect future expected

offsets, assuming members will have a minimum offset of 30%. Offsets due to overpayments will

apply until the overpayments are expected to be fully recovered based on the data received from

the plan administrator.


7 7 7

Offsets for Active Members

The valuation assumes that LTD Program benefits, after all applicable offsets, are 60% of the

benefits before the offsets.

Incurred But Not Reported (IBNR)

The liability for new LTD recipients was loaded by 20% to reflect IBNR.

Administrative Expenses

Administrative expenses, based on the amounts outlined in the Plan Provisions, are incorporated into the normal cost and actuarial accrued liability as follows:

The account management fee is explicitly included with the normal cost,

The new claims fee is included in the active member liability, and

The claims management fee is included in both the active member liability and the reserve for open claims.

8

SECTION E

SUMMARY OF DATA AND EXPERIENCE

Arizona State Retirement System E-1

Expected Actual/

Actual Total Actual Proposed Retirement Expected

Age Retirement Count Rate Rate (3) * (5) (2) / (6)

(1) (2) (3) (4) (5) (6) (7)

50 85 214 40% 25% 54 157%

51 100 308 32% 25% 77 130%

52 75 515 15% 20% 103 73%

53 77 547 14% 20% 109 71%

54 111 604 18% 20% 121 92%

55 120 569 21% 20% 114 105%

56 129 645 20% 20% 129 100%

57 100 631 16% 20% 126 79%

58 124 695 18% 20% 139 89%

59 126 688 18% 20% 138 91%

60 135 703 19% 20% 141 96%

61 156 673 23% 20% 135 116%

62 133 590 23% 28% 162 82%

63 90 414 22% 28% 114 79%

64 100 375 27% 28% 103 97%

65 107 302 35% 30% 91 118%

66 72 222 32% 30% 67 107%

67 71 210 34% 28% 58 122%

68 38 144 26% 28% 40 95%

69 52 143 36% 28% 39 133%

70 37 108 34% 28% 30 123%

71 26 106 25% 28% 29 90%

72 18 86 21% 28% 24 75%

73 10 71 14% 28% 20 50%

74 13 57 23% 28% 16 81%

75 11 32 34% 28% 9 122%

76 5 29 17% 28% 8 63%

77 5 19 26% 28% 5 100%

78 10 21 48% 30% 6 167%

79 12 18 67% 30% 5 240%

80 13 25 52% 100% 25 52%

Total 2,161 9,764 22% 2,237 97%

Retirement Experience for the Five-Year Period Ending June 30, 2016Males and Females

First Time Member Reaches Eligibility for Rule of 80


Expected Actual/



(1) (2) (3) (4) (5) (6) (7)

50 0 0 0% 0% 0 0%

51 67 260 26% 25% 65 103%

52 221 872 25% 25% 218 101%

53 363 1,676 22% 22% 370 98%

54 423 2,272 19% 20% 461 92%

55 530 2,859 19% 20% 576 92%

56 596 3,244 18% 20% 647 92%

57 602 3,675 16% 20% 725 83%

58 636 4,113 15% 18% 727 87%

59 747 4,642 16% 17% 803 93%

60 726 4,945 15% 17% 847 86%

61 1,093 5,278 21% 21% 1,109 99%

62 2,511 10,549 24% 25% 2,637 95%

63 1,570 8,226 19% 20% 1,683 93%

64 1,631 6,959 23% 25% 1,740 94%

65 2,934 9,812 30% 30% 2,917 101%

66 1,980 6,785 29% 30% 2,016 98%

67 1,298 5,031 26% 25% 1,258 103%

68 981 3,771 26% 25% 943 104%

69 717 2,834 25% 25% 709 101%

70 542 2,168 25% 25% 542 100%

71 421 1,711 25% 25% 428 98%

72 348 1,360 26% 25% 340 102%

73 231 1,048 22% 20% 212 109%

74 236 828 29% 27% 227 104%

75 174 646 27% 27% 177 98%

76 143 521 27% 27% 143 100%

77 97 404 24% 25% 101 96%

78 96 332 29% 30% 99 97%

79 69 234 29% 30% 70 99%

80 186 612 30% 100% 612 30%

Total 22,169 97,667 23% 23,402 95%


Eligible for Unreduced Retirement minus First Eligibility for Rule of 80


Expected Actual/



(1) (2) (3) (4) (5) (6) (7)

50 1,515 23,317 0% 6% 1,399 0%

51 1,539 23,742 6% 6% 1,425 108%

52 1,636 23,457 7% 7% 1,642 100%

53 1,579 22,774 7% 7% 1,594 99%

54 1,572 21,935 7% 7% 1,535 102%

55 1,626 21,011 8% 7% 1,471 111%

56 1,518 19,726 8% 7% 1,381 110%

57 1,434 18,483 8% 7% 1,294 111%

58 1,539 17,258 9% 9% 1,553 99%

59 1,436 15,485 9% 9% 1,394 103%

60 1,367 13,691 10% 10% 1,369 100%

61 1,762 12,093 15% 15% 1,814 97%

62 774 4,342 18% 15% 651 119%

63 586 3,657 16% 15% 549 107%

64 637 3,315 19% 20% 663 96%

Total 20,520 244,286 8% 19,734 104%


Eligible for Reduced Retirement


Expected Actual/

Years of Actual Total Actual Proposed Withdrawal Expected

Service Withdrawal Count Rate Rate (3) * (5) (2) / (6)

(1) (2) (3) (4) (5) (6) (7)

0 62,696 252,967 24.8% 23.0% 58,182 108%

1 81,175 415,282 19.5% 18.8% 78,073 104%

2 64,776 353,278 18.3% 15.7% 55,465 117%

3 48,765 325,462 15.0% 13.6% 44,263 110%

4 42,688 327,284 13.0% 11.9% 38,947 110%

5 35,841 327,593 10.9% 10.5% 34,397 104%

6 30,748 342,808 9.0% 9.4% 32,224 95%

7 31,210 349,018 8.9% 8.4% 29,317 106%

8 22,349 324,032 6.9% 7.5% 24,302 92%

9 19,651 303,376 6.5% 6.7% 20,326 97%

10 18,709 289,949 6.5% 6.0% 17,397 108%

11 14,370 274,391 5.2% 5.3% 14,543 99%

12 13,857 269,152 5.1% 4.7% 12,650 110%

13 12,263 272,572 4.5% 4.2% 11,448 107%

14 9,068 261,492 3.5% 3.7% 9,675 94%

15 8,672 244,752 3.5% 3.2% 7,832 111%

16 6,400 218,206 2.9% 2.7% 5,892 109%

17 6,453 191,238 3.4% 2.3% 4,398 147%

18 3,948 158,881 2.5% 1.9% 3,019 131%

19 3,260 136,395 2.4% 1.5% 2,046 159%

20 Plus 12,397 507,670 2.4% 1.1% 5,584 222%

Total 549,295 6,145,799 9% 509,980 108%

Withdrawal Experience for the Five-Year Period Ending June 30, 2016*Males

Entry age of 35 or younger

*Withdrawal is salary weighted ($'s in thousands) and indicates any termination of active

employment for reasons other than death, disability or retirement.


Expected Actual/



(1) (2) (3) (4) (5) (6) (7)

0 100,858 390,149 25.9% 24.3% 94,806 106%

1 161,676 814,189 19.9% 20.0% 162,838 99%

2 133,054 709,668 18.7% 16.9% 119,934 111%

3 103,849 646,164 16.1% 14.7% 94,986 109%

4 95,770 653,762 14.6% 13.0% 84,989 113%

5 87,447 656,398 13.3% 11.7% 76,799 114%

6 79,997 674,048 11.9% 10.5% 70,775 113%

7 66,415 677,139 9.8% 9.5% 64,328 103%

8 55,178 635,885 8.7% 8.6% 54,686 101%

9 45,748 593,610 7.7% 7.8% 46,302 99%

10 40,809 564,087 7.2% 7.0% 39,486 103%

11 33,326 536,946 6.2% 6.4% 34,365 97%

12 30,871 523,545 5.9% 5.8% 30,366 102%

13 25,514 511,091 5.0% 5.2% 26,577 96%

14 22,802 488,743 4.7% 4.7% 22,971 99%

15 16,560 437,160 3.8% 4.2% 18,361 90%

16 12,588 376,542 3.3% 3.7% 13,932 90%

17 11,352 323,500 3.5% 3.3% 10,675 106%

18 9,076 279,115 3.3% 2.9% 8,094 112%

19 6,841 237,957 2.9% 2.5% 5,949 115%

20 Plus 21,636 914,207 2.4% 2.1% 19,198 113%

Total 1,161,370 11,643,905 10% 1,100,417 106%

Withdrawal Experience for the Five-Year Period Ending June 30, 2016*Females

Entry age of 35 or younger




Expected Actual/



(1) (2) (3) (4) (5) (6) (7)

0 95,409 468,781 20.4% 17.5% 82,037 116%

1 91,106 602,492 15.1% 14.8% 89,169 102%

2 64,331 474,168 13.6% 12.6% 59,745 108%

3 47,996 445,738 10.8% 11.0% 49,031 98%

4 33,070 337,646 9.8% 9.8% 33,089 100%

5 17,125 179,187 9.6% 8.8% 15,768 109%

6 12,477 168,678 7.4% 8.0% 13,494 92%

7 10,577 151,151 7.0% 7.2% 10,883 97%

8 7,328 119,264 6.1% 6.6% 7,871 93%

9 5,950 93,847 6.3% 6.0% 5,631 106%

10 3,872 72,894 5.3% 5.5% 4,009 97%

11 3,464 53,650 6.5% 5.1% 2,736 127%

12 1,730 35,767 4.8% 4.6% 1,645 105%

13 783 19,306 4.1% 4.2% 811 97%

14 194 3,811 5.1% 3.8% 145 134%

Total 395,412 3,226,378 12% 376,064 105%

Withdrawal Experience for the Five-Year Period Ending June 30, 2016*Males

Entry age over 35




Expected Actual/



(1) (2) (3) (4) (5) (6) (7)

0 137,807 576,709 23.9% 21.1% 121,686 113%

1 155,882 857,121 18.2% 17.4% 149,139 105%

2 103,260 683,845 15.1% 14.6% 99,841 103%

3 81,292 633,574 12.8% 12.6% 79,830 102%

4 60,733 525,082 11.6% 11.1% 58,284 104%

5 32,085 315,063 10.2% 9.9% 31,191 103%

6 25,600 293,236 8.7% 8.8% 25,805 99%

7 21,443 264,558 8.1% 7.9% 20,900 103%

8 15,729 220,276 7.1% 7.1% 15,640 101%

9 12,143 176,719 6.9% 6.4% 11,310 107%

10 8,761 130,553 6.7% 5.7% 7,442 118%

11 5,676 100,089 5.7% 5.1% 5,105 111%

12 3,794 68,715 5.5% 4.6% 3,161 120%

13 1,997 34,575 5.8% 4.1% 1,418 141%

14 125 6,853 1.8% 3.6% 247 50%

Total 666,325 4,886,968 14% 630,999 106%

Withdrawal Experience for the Five-Year Period Ending June 30, 2016*Females

Entry age over 35




Expected Actual/

Actual Total Actual Proposed Disability Expected

Age Disability Count Rate Rate (3) * (5) (2) / (6)

(1) (2) (3) (4) (5) (6) (7)

20 - 24 1 29,428 0.0034% 0.0475% 14 7%

25 - 29 24 79,247 0.0303% 0.0541% 43 56%

30 - 34 54 101,912 0.0530% 0.0712% 73 74%

35 - 39 113 127,509 0.0886% 0.1127% 144 79%

40 - 44 176 128,335 0.1371% 0.1737% 223 79%

45 - 49 341 136,896 0.2491% 0.2754% 377 90%

50 - 54 559 152,247 0.3672% 0.3695% 563 99%

55 - 59 648 137,392 0.4716% 0.4103% 564 115%

60 - 64 451 91,044 0.4954% 0.4441% 404 112%

65+ 109 39,690 0.2746% 0.1825% 72 150%

Total 2,476 1,023,700 0.2419% 2,476 100%

Disability Experience for the Five-Year Period Ending June 30, 2016Males and Females


Current Salary Scale 2007 - 2016 Actual Experience Proposed Salary Scale

Years of Step Rate/ Above Step Rate/ Step Rate/

Service Total Promotional Total Inflation Promotional Total Promotional

(1) (2) (3) (4) (5) (6) (7) (8)

1 6.75% 3.75% 6.73% 5.10% 4.56% 7.00% 4.50%

2 6.00% 3.00% 5.54% 3.90% 3.36% 6.00% 3.50%

3 4.90% 1.90% 4.86% 3.23% 2.68% 5.25% 2.75%

4 4.35% 1.35% 4.46% 2.83% 2.28% 4.75% 2.25%

5 4.05% 1.05% 4.15% 2.52% 1.98% 4.50% 2.00%

6 3.95% 0.95% 3.87% 2.24% 1.70% 4.25% 1.75%

7 3.75% 0.75% 3.59% 1.96% 1.42% 4.00% 1.50%

8 3.60% 0.60% 3.27% 1.64% 1.09% 3.60% 1.10%

9 3.60% 0.60% 3.09% 1.46% 0.91% 3.50% 1.00%

10 3.40% 0.40% 3.07% 1.44% 0.90% 3.40% 0.90%

11 3.20% 0.20% 2.87% 1.24% 0.70% 3.30% 0.80%

12 3.20% 0.20% 2.83% 1.20% 0.66% 3.20% 0.70%

13 3.20% 0.20% 2.69% 1.05% 0.51% 3.10% 0.60%

14 3.20% 0.20% 2.56% 0.93% 0.38% 3.00% 0.50%

15 3.20% 0.20% 2.55% 0.91% 0.37% 2.90% 0.40%

16 3.20% 0.20% 2.51% 0.88% 0.34% 2.80% 0.30%

17 3.20% 0.20% 2.38% 0.75% 0.21% 2.70% 0.20%

18 3.20% 0.20% 2.20% 0.57% 0.02% 2.70% 0.20%

19 3.20% 0.20% 2.37% 0.74% 0.20% 2.60% 0.10%

20 3.00% 0.00% 2.17% 0.54% 0.00% 2.50% 0.00%

Current Inflation Assumption 3.00% Proposed Inflation Assumption 2.30%

Current Productivity Component 0.00% Proposed Productivity Component 0.20%

Actual CPI-U Inflation for Period 1.63%

Apparent Productivity Component 0.54%

Service-Based Salary RatesMales and Females


Actual Total Actual Current Proposed

Age Deaths* Exposures* Rate Current Proposed Current Proposed (2) / (7) (2) / (8)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

50-54 24$ 8,961$ 0.27% 0.32% 0.23% 29$ 21$ 83.7% 114.9%

55-59 207 46,410 0.45% 0.50% 0.36% 233 166 88.6% 124.4%

60-64 576 96,936 0.59% 0.83% 0.61% 804 593 71.7% 97.1%

65-69 1,289 119,739 1.08% 1.30% 1.04% 1,551 1,250 83.1% 103.2%

70-74 1,372 79,067 1.73% 2.08% 1.83% 1,648 1,447 83.2% 94.8%

75-79 1,612 51,327 3.14% 3.13% 3.26% 1,608 1,673 100.2% 96.4%

80-84 2,090 34,118 6.13% 5.21% 5.75% 1,778 1,962 117.6% 106.5%

85-89 1,873 17,791 10.53% 8.39% 9.99% 1,493 1,777 125.4% 105.4%

90-94 1,011 5,663 17.85% 14.52% 17.33% 822 981 122.9% 103.0%

95-99 260 874 29.79% 23.02% 29.44% 201 257 129.4% 101.2%

Total 10,314$ 460,886$ 10,168$ 10,128$ 101.4% 101.8%

* $ in ten-thousands of benefit

Post-Retirement Mortality ExperienceHealthy Males

Actual / ExpectedExpected Deaths*Assumed Rate


Actual Total Actual Current Proposed

Age Deaths* Exposures* Rate Current Proposed Current Proposed (2) / (7) (2) / (8)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

50-54 17$ 13,802$ 0.12% 0.18% 0.15% 24$ 20$ 69.6% 84.7%

55-59 230 75,659 0.30% 0.28% 0.20% 209 154 110.1% 149.1%

60-64 578 156,475 0.37% 0.50% 0.36% 786 565 73.5% 102.4%

65-69 1,014 166,623 0.61% 0.88% 0.66% 1,473 1,094 68.8% 92.7%

70-74 1,226 100,956 1.21% 1.40% 1.22% 1,416 1,227 86.6% 99.9%

75-79 1,426 59,579 2.39% 2.28% 2.30% 1,357 1,368 105.1% 104.3%

80-84 1,638 37,920 4.32% 3.98% 4.30% 1,509 1,632 108.5% 100.4%

85-89 1,791 21,256 8.43% 6.94% 7.96% 1,474 1,692 121.5% 105.8%

90-94 1,372 9,274 14.80% 12.26% 14.59% 1,137 1,353 120.7% 101.4%

95-99 530 2,099 25.26% 20.28% 26.43% 426 555 124.5% 95.6%

Total 9,823$ 643,642$ 9,812$ 9,660$ 100.1% 101.7%

* $ in ten-thousands of benefit

Post-Retirement Mortality ExperienceHealthy Females

Assumed Rate Expected Deaths* Actual / Expected

Agenda Item #8





MEMORANDUM

TO: The Arizona State Retirement System (ASRS) Board FROM: Mr. Paul Matson, Director Mr. Anthony Guarino, Deputy Director and Chief Operations Officer

Mr. Dave King, Assistant Director, Member Services Ms. Julie Lockwood, Program Administrator Mr. Frank Perri, Benefits Administrator Mr. Brian Crockett, Sr. Strategic Planning Analyst

DATE: October 19, 2017 RE: Agenda Item #8: Presentation, Discussion, and Appropriate Action Regarding the

ASRS Retiree Health Insurance Including: a. Goals; b. Health Insurance, Cost Allocation and Pricing Options c. Retrospective Rate Agreement and Distribution Methodology Options d. Strategic Health Insurance Policies

Purpose Presentation, Discussion and Appropriate Action on the ASRS Retiree Health Insurance program with respect to:

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

Recommendations Approve the following two Strategic Policies:

1. Strategic Health Insurance Premium Setting Policy 2. Strategic Health Insurance Retrospective Rate Agreement Management and Distribution

Policy Background Previously, the Operations and Audit Committee approved this recommendation to move to the Board for approval; however, given the significant change in the Board / Committee membership this agenda item was re-presented to the current Operations, Audit, and Legislative Committee for re- review / approval prior to moving to the Board. Beginning in 2011, and applicable to subsequent plan years, the ASRS negotiated an annual “medical loss ratio” agreement with UnitedHealthcare (UHC), our retiree medical plans provider. This agreement, referred to as a Retrospective Rate Agreement (RRA), provides a maximum level of retention by UHC of 7% of total plan revenues. From this retention, UHC pays all administrative, legal and marketing expenses, staff salaries, and other company expenses. Remaining revenues from the 7% are deemed to cover the expenses and profit for UHC.


Agenda Item #8 HI & RRA October 19, 2017 Page 2 of 3 This RRA agreement stipulates that 93% of plan revenues be used for plan expenses associated with medical, hospital, prescription medications, and ancillary medical services. If these plan expenses do not result in the agreed-to 93% medical loss ratio (plan expenses / total revenues), then the ASRS receives a reimbursement of unused revenue up to the 93% level. If plan expenses exceed the 93% loss ratio, UHC’s 7% is decreased until all plan expenses are paid. Though the ASRS has been receiving annual reimbursement funds as a result of the RRA, this is not the objective. Ideally, the health care provider would be able to precisely underwrite each of its retiree medical plans so that annual premiums paid by our members for the benefits they receive would not result in any surplus or deficit. However, the results of medical management programs (such as case management, disease management, chronic obstructive pulmonary disease, cancer support, and coronary artery disease programs), utilization, medical trends expense, and drug costs play a significant and variable role in each year’s financial outcome, with future retrospective rate agreement receipts therefore likely. The ASRS has experienced retrospective reimbursements that otherwise would have been retained by UHC, due to several factors including:

• Having the RRA agreement. • Conservative underwriting methodologies in setting premium rates. • Variability of assumptions from outcomes. • The Centers for Medicare and Medicaid Services (CMS) gave credit to UHC in a greater

percent than usually expected due to UHC’s ability to effectively manage health care costs and in UHC’s favorable containment/outcome activities.

Attachments to this memo include:

A. Proposed ASRS Group Health Insurance Goals ASRS staff considered changes to the existing Strategic Goal of the Health Insurance Program, taking into account such factors as changes in the insurer marketplace, rising costs of health care, accessibility of provider networks and customer service standards. The attached document ‘Proposed ASRS Group Health Insurance Goals’ outlines staff recommendations for changes to the Goals.

B. Health Insurance Cost Allocation and Pricing Options ASRS staff reviewed several options for utilizing an Integrated Case Underwriting (ICU) methodology. The attached document ‘ASRS Group Health Insurance Premium Pricing Options,’ outlines the options, provides benefits as well as the concerns of each option, and makes a staff recommendation for Board consideration.

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

Agenda Item #8 HI & RRA October 19, 2017 Page 3 of 3

D. Impact of ICU Cross Subsidies from Medicare to Non-Medicare, since 2011 This analysis compares the final RRA results with the application of an ICU in years 2011-2016, estimating impact on premiums and revenues against actual costs incurred.

E. Pro Forma Estimate of First-Year Distribution This analysis estimates the initial payout from the RRA corpus to eligible members, targeted for late 2017.

F. Investment Benchmark This document summarizes the attributes of the investment strategy and benchmark that would be utilized to invest the RRA funds.

Proposed ASRS Group Health Insurance Goals

For the sole benefit of all eligible members, the ASRS will offer Health Insurance plans which have the following characteristics:

1. Cost Competitive, with respect to each marketplace & benefit structure

2. Accessible, with respect to provider networks for all services covered

3. Efficient, with respect to enrollment and in-plan navigation

4. Strong Customer Service, from vendors and ASRS staff

These goals will be utilized to both help guide the ASRS in developing Health Insurance (Medical, Dental, Vision) plans, and also in the development of high standard performance metrics. NB: Objectives will be developed once Goals are approved. ---------------------------------------------------------------------------------------------------------------- The current goal related to ASRS Health Insurance is included below: “Provide health, disability, and supplemental defined contribution programs that are accessible, affordable, reliable, and efficiently run.”

Cost Allocation and Pricing Methodology Options Page | 1

Arizona State Retirement System Cost Allocation and Pricing Methodology Options

Key ASRS Definitions Whole Case Underwriting (WCU) Whole case underwriting aggregates the entire enrolled population in order to determine a single rate (often referred to as a blended rate) which then applies to all retiree categories applicable to Medicare and non-Medicare retirees. The benefit structure under WCU is typically identical. In other words, there is a single plan design and a single premium charged for each enrollee. In an active workforce environment, WCU results in younger employees subsidizing older employees, since the medical costs are lower for younger people than for older people. In a retiree group, WCU results in older retirees subsidizing younger retirees, since Medicare payments in the plan more than offset the cost differential between younger people and older people. Integrated Case Underwriting (ICU) – An ASRS Term Integrated case underwriting aggregates segments of the enrolled population in order to mitigate differences between premiums charged to different groups. There are still multiple rates, but the rates determined incorporate at least some cross-subsidization among groups. Different plans may be offered, so the plan design can be different with ICU, which is not the case for WCU. In an active workforce environment, ICU results in younger employees subsidizing older employees, since the medical costs are lower for younger people than for older people. In a retiree group, ICU results in older retirees subsidizing younger retirees, since Medicare payments in the plan more than offset the cost differential between younger people and older people. ICU may be thought of as a partial case of WCU. Background There has been historical cross-subsidization between plans, including both Medicare eligible and non-Medicare eligible plans, as well as between urban and rural non-Medicare groups enrolled in the same PPO plan. A form of whole case underwriting for instance existed in 2001. Specifically, the Senior Supplement plan along with the non-Medicare HMO and non-Medicare PPO plans were considered one insurance plan for purposes of the Arizona Department of Insurance (AZDOI). Though premiums were determined separately, the plans used a basic health insurance provider delivery system as specified by the contracted medical vendor which the AZDOI accepted. In this respect, the contracted medical vendor only had to conduct one filing for all three plans and considered this approach to be whole case underwriting. To keep non-Medicare premiums more affordable while maintaining a plan that offered value, cross-subsidization utilizing Senior Supplement plan premiums began in 2007. This occurred in conjunction with an 8.1% increase in Senior Supplement plan premiums in 2007, bringing the monthly premium to $342. Today, for purposes of the Retrospective Rate Adjustment Agreement which began in 2011, the ASRS looks at the whole retiree health care program to determine a single medical loss ratio for purposes of any potential refund of premium.


Since 2011, the contracted medical vendor has utilized an ICU approach. The ICU allows the different costs and risks among the various groups of retirees to be aggregated in order to mitigate risk (a standard insurance practice) and mitigate premium differentials between plans. UHC does underwrite its three main plans (Medicare Advantage [MAPD], Senior Supplement with PDP, and non-Medicare) separately and sets initial premiums accordingly, but then looks at the whole group for purposes of the Retrospective Rate Adjustment Agreement and the 93% medical loss ratio target. Given the significant changes in the medical industry and the differences in risk profiles of the various plans, there has not been a formulaic approach utilized to date. Rather, the approach utilized has focused on achieving the following:

• Increase Affordability for all Retirees

• Limit the Magnitude of Cross Subsidizations

• Limit Incentives that Encourage Premature Retirements

• Limit Incentives for Migration between Plans

• Mitigate Premium Differentials

• Aggregate Risk Profiles Options Considered In general, the following options exist with respect to how ICU can be utilized. Each option is followed by a brief description and benefits and concerns of the option. 1. No Application of ICU

Description & Benefit: In this case there would be no cross subsidizations between Plans, and, as a result, each Plan would be self-funding at each point in time and premium rates would reflect actual costs for those members in each Plan.

Concerns: Those Plans that do not receive either CMS reimbursements or employer subsidizations would become more expensive for (pre-65) retirees.

By not aggregating the membership of the various Plans, the three smaller risk groups may result in marginally higher premium volatility.

Retirees would be subject to significantly different premium levels for similar levels of benefits.

2. Partial Application of ICU Description & Benefit: In this case there would be partial cross subsidizations between Plans. This could result in less intra-Plan and extra-Plan premium volatility, as well as currently increasing the affordability for pre-65 retirees who do not have access to an


employer subsidized Plan. In the current market-place, partial application of ICU allows the future status (Medicare eligible) of a retiree to subsidize the current status (non-Medicare eligible) of the retiree.

A reasonable partial ICU level would be an amount that would be limited within the following parameters: Not to exceed a 15% expected increase in the premiums for any Plan, compared to

the premiums with no ICU for the same respective Plan. Not to exceed a 20% expected decrease in the premiums of any Plan, compared to

the premiums with no ICU for the same respective Plan. ICU could be utilized within the parameters above if both of the following exist: The premium level of one or more plans is considered very high in absolute dollar

terms, relative to the average ASRS pension payment. The premium differences between plans are considered very high in absolute dollar

terms, relative to the average ASRS pension payment.

Concerns: Adverse Impact - Mitigating the differences between actual plan costs and premiums paid by members may marginally increase utilization of the more costly plans, and also marginally encourage active employees to retiree when they cannot afford the actual, unsubsidized, cost of medical coverage.

Equity - Partial ICU could appear somewhat inequitable to those retirees who are paying premiums above those who would be required to obtain Plan-level price equilibrium. Sustainability - If retirees are paying somewhat above-market rates for Plan benefits in order to cross-subsidize other retirees, membership in the subsidizing Plan could somewhat decrease and reduce the sustainability of the Plan while also reducing the amount available for cross-subsidization.

3. Complete Application of ICU

Description & Benefit: In this case, ICU effectively becomes WCU. This would result in the same premium levels for each retiree choosing the same benefit level. Concerns: Adverse Impact - Mitigating the differences between actual plan costs and premiums paid by members may marginally increase utilization of the more costly Plans, and also encourage active employees to retiree when they cannot afford the actual, unsubsidized, cost of medical coverage.

Equity - Complete ICU could appear inequitable to those retirees who are paying premiums above those which would be required to obtain Plan-level price equilibrium.

Sustainability - If retirees are paying above-market rates for plan benefits in order to cross-subsidize other retirees, membership in the subsidizing Plan could decrease and reduce the sustainability of the Plan while also reducing the amount available for cross-subsidization.


Recommendation: Partial Application of ICU The following ordered factors were utilized in determining the initial option for consideration:

1. Mitigate premium differentials for programs with similar benefits 2. Limit the magnitude of cross subsidizations 3. Limit incentives that encourage premature retirements 4. Limit incentives for migration between plans 5. Aggregate risk profiles

Authorizations Interpretations: The Director will be responsible for interpreting and implementing a policy that will be developed to reflect the Board’s decision. Amendments & Modifications: Amendments and modifications of the policy will require Board approval.

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Arizona State Retirement System Policy: Retrospective Rate Agreement (RRA) –

Background, Options and Distribution Methodology

Background: The ASRS has incorporated an annual one-way “Retrospective Rate Agreement” (RRA) requirement within the retiree health benefits program contract since 2011, currently with United Healthcare (UHC) (“program vendor”). The RRA requires that aggregate revenues, including Center for Medicare/Medicaid Services (CMS) payments, health insurance premiums paid by members enrolled in an ASRS eligible health plan (“members") and any other revenue sources, above a certain expense threshold, be refunded to the ASRS. The contractual requirement uses a ratio referred to as the “medical loss ratio” (MLR), which is currently set at a 93% threshold. The ASRS’s purpose for including the RRA requirement was to require that aggregate revenues in excess of the costs of the health services provided to ASRS retirees, would be refunded to the ASRS if they exceed a certain threshold. In other words, if the aggregate revenues received by the retiree health benefits provider exceed the aggregate costs of the services provided to members, plus an amount for expenses, overhead, and profit, then the excess would be refunded to the ASRS for the benefit of retirees rather than be retained by the retiree health benefits provider and thereby added to corporate profits. The current (2015) and past RRAs have provided a maximum level of retention by UHC of 7% of total plan revenues. From this retention, UHC pays all administrative, legal, and marketing expenses, staff salaries, and other company expenses. Remaining revenues from the 7% are deemed to be profit for UHC. As a result, 93% of plan revenues are to be used for plan expenses associated with medical, hospital, prescription medications, and ancillary services and treatments. If these plan expenses do not result in the 93% MLR (plan expenses/total revenues), then the ASRS receives a reimbursement of unused revenue up to the 93% level. If plan expenses exceed the 93% loss ratio however, then UHC’s 7% is decreased until all plan expenses are paid, reflecting the one-way nature of the RRA. Status: Since the 2011 plan year, the ASRS has received annual reimbursements. As of September 30, 2017 the RRA account balance is approximately $111,130,250. The RRA account balances are recorded in the ASRS’s financial statements, but are specifically excluded from the funded status of any of the ASRS programs because they are separate assets associated with the health benefit programs. As such, expending funds from the account balance would not impact any funded status calculation or cause an impact on current or projected contribution rates.

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RRA Funds Generated by Plan

Calendar Year Medicare

Advantage HMO Medicare

Senior Supplement

Non-Medicare In-State Choice

and Out-of-State Choice Plus Total RRA Refund 2011 $12,953,384 $12,657,048 -$10,115,733 $15,494,689 2012 $22,787,653 $13,298,585 -$10,260,713 $25,825,525 2013 $19,581,656 $13,465,983 -$3,199,340 $29,848,299 2014 $17,703,883 $12,408,956 $1,394,383 $31,507,222 2015 $1,869,941 $9,600,921 -$3,016,357 $8,454,505

2016* $0.00 $0.00 $0.00 $0.00 Totals: $74,898,517 $61,431,493 -$25,197,760 $111,130,250

* Calendar year 2016 amounts are estimated as of October 19, 2017. Options Considered: In general, the following options exist with respect to how the RRA balances could be utilized. Each option is followed by a brief description and benefit of the option, and includes the key concerns.

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

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

2. Reduce Health Insurance Co-payments

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

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

3. Enhance Wellness Initiatives

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

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

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

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

Self-funding would require more internal staff management and staff (FTE) resources.

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

5. Upgrade Information Technology Systems

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

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

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

6. Reduce or Refund Health Insurance Premiums for all Plans: Monthly Basis

Description & Benefit: All monthly health insurance premiums could be reduced by various amounts and over various future periods until the RRA account balance is eliminated, therefore benefiting all groups of retirees. The premium reduction benefit will be spread out monthly throughout each year. Reductions would apply only to members enrolled in an eligible plan for the entire calendar year for which the distribution is being made, and distribution amounts would be determined by the calendar year enrollment and the member would need to be enrolled in an eligible plan during each month of the distribution.

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Concerns: Member groups that did not contribute to the funding of the RRA account balance would benefit at the expense of those groups that did contribute. Members could migrate from plans contributing to the RRA account balance to plans no contributing to the RRA account balance to arbitrage premiums. This possibility and expected benefit would likely be de minimis.

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

7. Reduce or Refund Health Insurance Premiums for all Plans: Annual Basis

Description & Benefit: A portion of all eligible enrolled members’ annual medical plan premiums would be returned to members until the RRA account balance is eliminated, thereby benefiting all groups of members. The refund benefit will occur once a year. Alternatively, all health insurance premiums could be reduced by various single annual amounts and over various future periods until the RRA account balance is eliminated, therefore benefiting all groups of members. The premium reduction benefit would occur once a year. Reductions or refunds would apply only to members enrolled in an eligible plan for the entire calendar year for which the distribution is being made, and distribution amounts will be determined by the calendar year enrollment and the member would need to be enrolled in an eligible plan during the month of the distribution.

Concerns: Member groups that did not contribute to the funding of the RRA account balance would benefit at the expense of those groups that did contribute. Members could migrate from plans contributing to the RRA account balance to plans no contributing to the RRA account balance to arbitrage premiums. This possibility and expected benefit would likely be de minimis.


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8. Reduce or Refund Health Insurance Premiums Only for Plans that Contributed to the RRA Account Balance: Monthly Basis

Description & Benefit: Only those health insurance plans that contributed to the RRA account balance (“contributing plans”) would benefit from the RRA account balance. Premiums for contributing plans would be reduced by various monthly amounts and over various future periods until the RRA account balance is eliminated, therefore benefiting only those groups of members that contributed to the RRA account balance. The premium reduction benefit would be spread out monthly throughout each year. Reductions would apply only to members enrolled in an eligible plan that contributed funds to the RRA account balance for the entire calendar year for which the distribution is being made, and distribution amounts would be determined by the calendar year enrollment and the member would need to be enrolled in an eligible plan during each month of the distribution.

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


9. Reduce or Refund Health Insurance Premiums Only for Plans that Contributed to the RRA

Account Balance: Annual Basis Description & Benefit: Only those health insurance plans that contributed to the RRA account balance (“contributing plans”) would benefit from the RRA account balance. Members enrolled in such contributing plans would receive a refund of a portion of their annual medical plan premiums until the RRA account balance is eliminated, thereby benefiting only those groups of members that contributed to the RRA account balance. The premium refund benefit would occur once a year. Alternatively, premiums for contributing plans could be reduced by single annual amounts and over various future periods until the RRA account balance is eliminated. The premium reduction benefit would occur once a year. Reductions or refunds would apply only to members enrolled in an eligible plan that contributed funds to the RRA account balance for the entire calendar year for which the distribution is being made, and distribution amounts would be determined by the calendar year enrollment and the member would need to be enrolled in an eligible plan during the month of the distribution.

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

Members who may change from among the various plans for non-arbitrage (standard health-care) reasons may randomly receive or not receive the premium reduction. This possibility and expected costs/benefit would likely be de minimis.

10. Implement Premium Holidays only for Members that Contributed to the RRA Account

Balance Description & Benefit: Only those members that were enrolled in a health insurance plan that contributed to the RRA account balance (“contributing members”) would benefit from the RRA account balance. Premiums for contributing members would be reduced by single annual amounts and over various future periods until the RRA account balance is eliminated, therefore benefiting only those retirees that contributed to the RRA account balance. The premium reduction benefit would occur once a year.

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

Recommendation: Modified Option #9: “Refund Health Insurance Premiums Only for Plans that Contributed to the RRA Account Balance: Annual Basis”

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

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

• Cost/Benefit Equity o Ensuring that members and plans which fund the RRA account balance also receive the

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

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

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

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

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

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Concepts & Parameters: The RRA Fund will be managed as a going concern with the expectation the Fund will have a perpetual life. The RRA requirement is expected to be included in future procurements. A wind-down process will also be in place should future contributions to the RRA Fund not occur, or if the market-place is not responsive to RRA terms in the future. Specifically, the RAA Fund will be targeted to be fully distributed over an approximately four-year period if future RRA funds are no longer generated. The wind-down distribution rate will be approximately 25% per year of the beginning corpus such that the final balance at the end of the fourth distribution will be approximately zero. The RRA Fund will target a relatively ‘constant payout level,’ a characteristic similar to that of an endowment, except the RRA Fund: Will have a declining absolute distribution level and final termination period if funds are not

being constantly generated. The payout rate will be significantly higher in order to ensure that the members who contribute

to the RRA fund will be the predominant beneficiaries of the RRA Fund. Future contributions to the corpus are primarily a function of percentages of growing nominal dollars, and therefore future payouts are reasonably expected to hold value in real terms, although this is not a requirement of the payout structure. On the other hand, the longer RRA arrangements exist, the more accurate the premium estimates and negotiations may become, which would reasonably result in reduced RRA receipts in the future until a vendor / client risk equilibrium is met. Payout Methodology:

1. Twenty-Five percent (25%) of the corpus of the fund will be paid out each year unless no new RRA funds were generated, in which case the aggregate payout will be approximately equal to the previous year up to the total balance of the fund.

2. The funds will only be paid to members who elect to enroll in an ASRS ‘Eligible Medical Plan.’ 3. An ASRS ‘Eligible Medical Plan’ is a plan that provides medical benefits at a level and to a

membership generally consistent with a plan that has contributed to the RRA account balance. (There are currently three plans with four different rate structures as follows: Non-Medicare In-State Choice, Non-Medicare Out-of-State Choice Plus, Medicare Advantage HMO, Medicare Senior Supplement.)

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

5. A participant must be enrolled in an Eligible Medical Plan in December of the calendar year which a distribution is being paid and enrolled in an Eligible Medical Plan when the distribution calculation is made.

6. Distributions will be in dollar amounts. 7. Each distribution would be one-time and not perpetual. 8. Calculation Periods will be based upon calendar years (CYs) 9. Distribution Periods will be based upon calendar years (CYs) 10. The Distribution month will be determined by ASRS staff based upon the availability of data and

logistics.

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Perpetual Fund Logic: A perpetual fund concept will allow for a more even distribution and may mitigate premium volatility. High Payout Rate Logic: A higher payout rate (25%) will allow quicker payments to the groups that generally have paid for the RRA Funds, and that generally have a shorter life expectancy as compared to most endowments. See attached appendix for a working example. Fund Investment Management The RRA Fund will be managed in a relatively conservative nature for the following reasons:

1. Relatively Short Duration of the Liabilities The average age of a retiree is approximately 70, with consequent average expected liability duration of approximately 17 years, and a limited ability to support financial market volatility.

2. Unknown Future Cash Inflows The size of future RRA contributions, and the likelihood that the RRA requirement will be accepted in future contracts, is unknown due to shifting cost trend lines and the shifting health insurance marketplace.

3. Unknown Recipient Population The implementation of the Affordable Care Act (ACA) as well as the advent of private exchanges may cause a change to the population of retirees who enroll in an ASRS health insurance plan and are therefore eligible for the RRA distribution.

As such, the ordered Investment Goals for the RRA Fund are as follows: A. Low Volatility of Capital

Some volatility of capital may occur, but should be limited.

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

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

Investment Benchmark: U.S. Gov/Credit Float Adjusted: 1-5 Year Fund Management and Accounting The RRA funds may be managed internally or externally, and may be commingled with other assets. The RRA funds will be accounted for as a separate fund. Authorizations Interpretations: The Director will be responsible for interpreting and implementing the Strategic Health Insurance Retrospective Rate Agreement Distribution Policy. Amendments & Modifications: Amendments and modifications of this policy require Board approval.

Impact of ICU Cross Subsidization From Medicare to Non-Medicare, Since 2011SS + PDP

Medicare In-State Plan Out-of-State Plan% Premium

Increase % Premium Decrease% Premium

Decrease Difference2017 7,500,000.00$ 15.2% -7.9% -5.6% Unknown2016 7,000,000.00$ 14.5% -7.6% -5.5% 7,000,000.00$ -$ *Estimated as of 10/19/2017: ICU insufficient to achieve 7% profit2015 11,000,000.00$ 23.8% -10.7% -7.6% 3,016,357.00$ (7,983,643.00)$ 2014 9,500,000.00$ 21.1% -8.4% -6.0% -$ (9,500,000.00)$ *No ICU needed when Choice achieved 91% loss ratio2013 15,000,000.00$ 34.5% -14.0% -10.0% 3,199,339.00$ (11,800,661.00)$ 2012 4,200,000.00$ 10.0% -4.4% -3.1% 4,200,000.00$ -$ *ICU insufficient to achieve 7% profit2011 2,500,000.00$ 6.1% -2.9% -2.1% 2,500,000.00$ -$ *ICU insufficient to achieve 7% profit

ICU Notes1 Average % premium increase due to ICU for SS + PDP Plan 2011-2017 17.9%2 Average % premium decrease due to ICU for CHOICE Plan 2011-2017 -8.0%3 ICU insufficient to generate 7% profit for CHOICE in 2011 and 20124 Average ICU agreed upon 2011-2017 8,100,000.00$ 5 Average ICU actually needed 2011-2017 3,319,282.67$

If we did not have an ICU (see other tabs for details on these conclusions)1 Non-Medicare would have had > 100% loss ratio on RRA report in 20112 Non-Medicare short of 7% profit margin in 4 of 5 years3 Senior Supplement+PDP short of 7% profit margin in 2 of 5 years

CHOICE

Actual ICU Required

Agreed-Upon ICU Used to Set Premiums

Pro Forma Estimate of First-Year Distribution RRA Refund Amounts by Plan and Year

Calendar Year

RRA Amount Generated Medicare

Advantage HMO

% of RRA

Refund

Dollars applied to Plan Refund

Pool

RRA Amount Generated

Senior Supplement

% of RRA

Refund


Pool

RRA Amount Generated

Non-Medicare

% of RRA

Refund


Pool Total RRA

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

2016* $0.00 0.00% $0.00 $0.00 0.00% $0.00 $0.00 0.00% $0.00 $0.00 Total by Plan: $74,898,517 $60,913,147.31 $61,431,493 $48,821,332.76 -$25,197,760 $1,395,769.93

Corpus of RRA: $111,130,250

Calendar Year 2017 Enrollments Medicare Advantage - Single : 15,675 Senior Supplement - Single: 10,268 Choice - Single: 5,672 Medicare Advantage - Dual: 3,412

Senior Supplement - Dual: 1,341

Choice - Family: 767

Medicare Advantage - Triple: 7

Senior Supplement - Triple: 4

Choice Plus - Single: 115 Choice Plus - Family: 13

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

Medicare Advantage Calculation Senior Supplement Calculation Non-Medicare Calculation

Medicare Advantage HMO Corpus * 25% MedAdvSingle Coverage +

(MedAdvFamily Individuals Covered Count)

= Single

Coverage Payment

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

Count)

= Single

Coverage Payment

Non-Medicare Corpus * 25% NonMedSingle Coverage +

(NonMedFamily Coverage * NonMedFamily

Premium/NonMedSingle Premium)

= Single

Coverage Payment

$60,913,147.31* 25%

15,675 + (3,412 * 2 + 7 * 3) = $676.21 $48,821,332.76 * 25%

10,268 + (1,341* 2 + 4 * 3) = $941.62

$1,395,769.93 * 25% 5,672+ 115 + (767 * $1,480/$740) +

(13 * $2,070/$1,035) = $47.49

Calendar Year 2016 Annual Refund Amounts (to be paid in Calendar Year 2017):

Medicare Advantage - Single = $676.21 Senior Supplement - Single = $941.62 Choice - Single = $47.49 Medicare Advantage - Dual = $1,352.42 Senior Supplement - Dual = $1,883.24 Choice - Family = $94.98 Medicare Advantage - Triple = $2,028.63 Senior Supplement - Triple = $2,824.86 Choice Plus - Single = $47.49

Choice Plus - Family = $94.98

Total Distribution: $27,774,903.71 *Note: 2016 amounts are estimated as of October 19, 2017

Bloomberg Barclays Indices A Bloomberg Professional service offering

US Government/Credit Float-Adjusted 1-5 Year Index1

US Government/Credit Float-Adjusted 1-5 Year Index The Bloomberg Barclays US Government/Credit Float-Adjusted 1-5 Year Bond Index is a Float-Adjusted version

of the US Government/Credit Index, which tracks the market for investment grade, US dollar-denominated,

fixed-rate treasuries, government-related and corporate securities. Both the flagship US Government/Credit

Index and the Float-Adjusted version exclude holdings of US Treasuries, but the Float-Adjusted version also

excludes US agency debentures held in the Federal Reserve SOMA account. To be included in the US

Government/Credit Float-Adjusted 1-5 Year Index, securities must have at least one, and up to, but not

including five years to maturity. The Bloomberg Barclays Float-Adjusted index family was launched in July

2009 with an inception date of July 1, 2009.

___ ___ Composition by Sector (MV%) – December 30, 2016 Composition by Quality (MV%) – December 30, 2016

Rules for Inclusion

Sector Treasuries, government-related (sovereign, agency, local authority and supranational), and corporate issuers are

eligible.

Eligible Currencies Principal and interest must be denominated in USD.

Quality Securities must be rated investment grade (Baa3/BBB-/BBB- or higher) using the middle rating of Moody’s, S&P

and Fitch; when a rating from only two agencies is available, the lower is used; when only one agency rates a

bond, that rating is used. In cases where explicit bond level ratings may not be available, other sources may be

used to classify securities by credit quality:

• Local currency treasury and hard currency sovereign issues are classified using the middle issuer level rating

from each agency for all outstanding bonds, even if bond level ratings are available.

• Expected ratings at issuance may be used to ensure timely index inclusion or to properly classify split-rated

issuers.

• Unrated securities may use an issuer rating for index classification purposes if available. Unrated subordinated

securities are included if a subordinated issuer rating is available.

Coupon • Fixed-rate coupon.

• Callable fixed-to-floating rate bonds are eligible during their fixed-rate term only.

59.4%12.9%

22.7%

Treasury

Government

RelatedCorporate

68.4%

7.2%

11.8%

12.7%

Aaa

Aa

A

Baa

February 22, 2017

US Government/Credit Float-Adjusted 1-5 Year Index 2

Rules for Inclusion

• Bonds with a step-up coupon that changes according to a predetermined schedule are eligible.

Amount Outstanding • All securities must have USD250mn minimum par amount outstanding

• US Treasuries and US agency debentures held in the Federal Reserve SOMA account (both purchases at

issuance and net secondary market transactions) are deducted from the total amount outstanding. New

issuance bought at auction by the Federal Reserve does not enter the index. Net secondary market

purchases/sales are adjusted at each month-end with a one-month lag.

As previously announced, the minimum amount outstanding for US Aggregate Indices will be raised to USD300mn

from USD250mn for Treasury, Government-Related and Corporate securities as of April 1, 2017.

Maturity • Securities must have at least 1 and up to, but not including, 5 years remaining to final maturity, regardless of

optionality.

• Bonds that convert from fixed to floating rate, including fixed-to-float perpetual, will exit the index one year

prior to conversion to floating-rate. Fixed-rate perpetual bonds are not included.

Market of Issue • SEC-registered securities, bonds exempt from registration at the time of issuance and SEC Rule 144A

securities with registration rights are eligible. A security with both SEC Regulation-S (Reg-S) and SEC Rule

144A tranches is treated as one security for index purposes. The 144A tranche is used to prevent double-

counting and represents the combined amount outstanding of the 144A and Reg-S tranches.

• Global bonds are included.

• Bonds that were previously SEC-registered or 144A with registration rights but later deregistered by the

issuer remain index eligible.

Seniority of Debt Senior and subordinated issues are included.

Taxability • Only fully taxable issues are eligible.

• Build America Bonds (BAB) with the tax credit to the issuer are eligible; those with tax credits issued to

investors are considered tax exempt.

• Dividend Received Deduction (DRD) and Qualified Dividend Income (QDI) eligible securities are excluded.

Security Types Included

• Bullet, putable, sinkable/amortizing and callable

bonds

• Taxable municipal securities, including Build

America Bonds (BAB)

• Original issue zero coupon bonds

• Underwritten MTN

• Enhanced equipment trust certificates (EETC)

• Certificates of deposit

• Fixed-rate and fixed-to-float (including fixed-to-

variable) capital securities

Excluded

• US Treasuries and US agency debentures held in the

Federal Reserve SOMA account

• Contingent capital securities, including traditional

CoCos and contingent write-down securities, with

explicit capital ratio or solvency/balance sheet–based

triggers

• Bonds with equity type features (eg, warrants,

convertibles, preferreds, DRD/QDI-eligible issues)

• Inflation-linked bonds, floating-rate issues

• Tax-exempt

• Private placements, retail bonds

• USD25/USD50 par bonds

• Structured notes, pass-through certificates

• Illiquid securities with no available internal or third-

party pricing source

Rebalancing Rules

Frequency For each index, Bloomberg maintains two universes of securities: the Returns (Backward) and Projected (Forward)

Universes. The composition of the Returns Universe is rebalanced at each month-end and represents the fixed set

of bonds on which index returns are calculated for the next month. The Projected Universe is a forward-looking

February 22, 2017


Rebalancing Rules

projection that changes daily to reflect issues dropping out of and entering the index but is not used for return

calculations. On the last business day of the month (the rebalancing date), the composition of the latest Projected

Universe becomes the Returns Universe for the following month.

Index Changes During the month, indicative changes to securities (credit rating change, sector reclassification, amount

outstanding changes, corporate actions, ticker changes) are reflected daily in both the Projected and Returns

Universe of the index. These changes may cause bonds to enter or fall out of the Statistics Universe of the index

on a daily basis, but will affect the composition of the Returns Universe at month-end only, when the index is next

rebalanced.

Reinvestment of Cash Flows Intra-month cash flows from interest and principal payments contribute to monthly index returns but are not

reinvested at a short-term reinvestment rate between rebalance dates. At each rebalancing, cash is effectively

reinvested into the returns universe for the following month so that index results over two or more months reflect

monthly compounding.

New Issues Qualifying securities issued, but not necessarily settled on or before the month-end rebalancing date, qualify for

inclusion in the following month’s index if required security reference information and pricing are readily available.

Pricing and Related Issues

Sources & Frequency

Most index-eligible bonds are priced on a daily basis by Bloomberg’s evaluated pricing service, BVAL. Certain

segments of Eurodollar issues and LATAM USD-denominated bonds are priced by third party sources.

Timing • 3pm (New York time), except for taxable municipal bonds which are 4pm (New York time).

• On early market closes, prices are taken as of 1pm (New York time), unless otherwise noted.

• If the last business day of the month is a public holiday, prices from the previous business day are used.

Bid or Offer Side Bonds in the index are priced on the bid side. The initial price for new corporate issues entering the index is the

offer side; after the first month, the bid price is used.

Settlement Assumptions T+1 calendar day settlement basis for all bonds. At month-end, settlement is assumed to be the first calendar day

of the following month, even if the last business day is not the last day of the month, to allow for one full month of

accrued interest to be calculated.

Verification Daily price moves for each security are analyzed by the index pricing team to identify outliers. Index users may

also challenge price levels, which are then reviewed and updated as needed using input from various sources.

Currency Hedging Returns hedged to various non-USD currencies are published for the US Government/Credit Float-Adjusted 1-5 Year

Index. The indices’ FX hedging methodology takes rolling one-month forward contracts that are reset at the end of

each month and hedges each non-reporting currency-denominated bond in the index into the reporting currency

terms. No adjustment is made to the hedge during the month to account for price movements of constituent securities

in the returns universe of the index.

Calendar The US Government/Credit Float-Adjusted 1-5 Year Index follows the US bond market holiday schedule.

Index Ticker BFA1TRUU

February 22, 2017


Monthly Returns in USD, 2010-2016 (%)

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

2010 1.08 0.34 -0.22 0.52 0.43 0.81 0.79 0.50 .38 0.44 -0.46 -0.59 4.08

2011 0.39 -0.10 -0.02 0.81 0.70 -0.02 0.76 0.45 -0.30 0.31 -0.17 0.29 3.13

2012 0.68 -0.04 -0.09 0.44 0.08 0.07 0.56 0.17 0.15 0.02 0.18 0.00 2.24

2013 -0.08 0.28 0.07 0.29 -0.49 -0.55 0.33 -0.26 0.56 0.36 0.19 -0.40 0.29

2014 0.45 0.22 -0.26 0.30 0.43 -0.07 -0.18 0.36 -0.22 0.47 0.30 -0.35 1.43

2015 0.96 -0.38 0.39 0.07 0.09 -0.18 0.18 -0.05 0.47 -0.12 -0.23 -0.22 0.97

2016 0.89 0.19 0.52 0.15 -0.12 0.94 0.09 -0.20 0.15 -0.16 -0.95 0.06 1.57

Accessing Index Data

Bloomberg Professional® service Bloomberg benchmarks are the global standard for capital markets investors.

• INDEX<Go> - The Bloomberg Indices landing page is a dashboard for index-related information on the

terminal. Find daily and monthly index returns for key indices from each index family as well as index

publications including methodologies, factsheets, monthly reports, updates and alerts.

• IN<Go> - The Bloomberg Index Browser displays the latest performance results and statistics for the

indices as well as history. IN presents the indices that make up Bloomberg's global, multi-asset class

index families into a hierarchical view, facilitating navigation and comparisons. The "My Indices" tab allows

a user to focus on a set of favorite indices.

• PORT<Go> - Bloomberg’s Portfolio & Risk Analytics solution includes tools to analyze the risk, return, and

current structure of indices. Analyze the performance of a portfolio versus a benchmark or use models for

performance attribution, tracking error analysis, value-at-risk, scenario analysis, and optimization.

• DES<Go> - The index description page provides transparency into an individual index including

membership information, aggregated characteristics and returns, and historical performance.

Bloomberg Indices Website

(www.bloombergindices.com)

The index website makes available limited index information including:

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Data Distribution Index subscribers may choose to receive index data in files. Files may include:

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after market close

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• Index data is also available via authorized redistributors

Bloomberg Total Return Index Value Tickers: US Govt/Credit Float-Adjusted 1-5 Year and Related Indices

Ticker (USD Unhedged) Index Ticker (USD Unhedged) Index

BFA1TRUU US Government/Credit Float-Adjusted 1-5

Year LUGCTRUU US Government/Credit

LF97TRUU US Intermediate Government/Credit LUAGTRUU US Government

LGC5TRUU US Long Government/Credit LC07TRUU US Credit

Total Return Index Values are available in other currencies and on a hedged basis. Attributes such as yield and duration, are also available. Please refer to Accessing Bloomberg Barclays Index

Data Using Bloomberg Tickers for a full list of tickers and attributes that are available.

February 22, 2017


Index Licensing

Bloomberg requires index data licenses for services and products linked to the Indices

• Index or Constituent-Level Redistribution

• Exchange Traded Notes (ETNs)

• OTC Derivative Products

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February 22, 2017

US Government/Credit Float Adjusted 1-5 Year Index 6

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Arizona State Retirement System Strategic Health Insurance Policy: Premium Setting

Key Definitions Whole Case Underwriting (WCU) Whole case underwriting aggregates the entire enrolled population in order to determine a single rate (often referred to as a blended rate), which then applies to all retiree categories and is applicable to both Medicare and non-Medicare retirees. The benefit structure under WCU is typically identical. There is typically a single plan design and a single premium charged for each enrollee. Integrated Case Underwriting (ICU) Integrated case underwriting aggregates segments of the enrolled population in order to mitigate differences between premiums charged to different groups. There are still multiple rates, but the rates determined incorporate at least some cross-subsidization among groups. Different plans may be offered, so the plan design can be different with ICU, which is not the case for WCU. ICU may be thought of as a partial case of WCU. Premium Setting: In determining premiums among the various ASRS health insurance plans, a partial application of ICU will be utilized, and the following ordered factors will be considered in determining the application and extent of application of ICU:

1. Mitigate premium differentials for programs with similar benefits 2. Limit the magnitude of cross subsidizations 3. Limit annual premium volatility 4. Limit incentives that encourage premature retirements 5. Limit incentives for migration between plans 6. Aggregate risk profiles

The following parameters will apply to the application and extent of application of ICU: The ICU approach will be utilized only if both of the following two conditions exist. In addition, continued application of the ICU approach will truncate if either one of the following two conditions is no longer met through application of the ICU approach:

1. The monthly single rate premium level 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 differences between in-state plans is equal to or greater

than 10% of the MAA.


If both of the above requirements are met, then the following two limits will apply to the premium levels:

I. 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.

II. 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.

The MAA is defined as the mean average monthly annuity payment made to all ASRS payment recipients including payments to both beneficiaries and qualified domestic relations order recipients, in which the ASRS member had 30 or more years of credited service. The data for determining the MAA will:

• Be for the immediately prior fiscal year-end if available, or if not, then the proceeding fiscal year ended.

• Exclude lump sum payments • Exclude suspended annuities • Not adjust for optional forms of retirement • Not adjust for reductions for partial lump sum elections • Include both Plan and System members

Authorizations Interpretations: The Director will be responsible for interpreting and implementing this policy. Amendments & Modifications: Amendments and modifications of this policy will require Board approval.

1 | P a g e

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

Background: The ASRS has incorporated a “Retrospective Rate Agreement” (RRA) requirement within the retiree medical benefits program contract. The RRA requires that aggregate revenues, including Center for Medicare/Medicaid Services (CMS) payments, health insurance premiums paid by members enrolled in an ASRS eligible medical plan (“members") and any other revenue sources, above a certain expense threshold, be refunded to the ASRS. The ASRS’s purpose for including the RRA requirement was to require that aggregate revenues in excess of the costs of the medical services provided to ASRS retirees, would be refunded to the ASRS if they exceed a certain threshold. The ASRS may then rebate these funds to eligible members. The RRA account balances are recorded in the ASRS’s financial statements, but are specifically excluded from the funded status of any of the ASRS programs because they are separate assets associated to the medical benefit programs. As such, expending funds from the account balance would not impact any funded status calculation or cause an impact on current or projected contribution rates. Management: The RRA Fund will be managed as a going concern with the expectation the Fund will have a perpetual life. The RRA requirement is expected to be included in future procurements. A wind-down process will also be in place should future contributions to the RRA Fund not occur, or if the market-place is not responsive to RRA terms in the future. Specifically, the RAA Fund will be targeted to be fully distributed over an approximately four-year period if future RRA funds are no longer generated. The wind-down distribution rate will be approximately 25% per year of the beginning corpus such that the final balance at the end of the fourth distribution will be approximately zero. The RRA Fund will target a relatively ‘constant payout level,’ a characteristic similar to that of an endowment, except the RRA Fund: Will have a declining absolute distribution level and final termination period if funds are not being

constantly generated. The payout rate will be significantly higher in order to ensure that the members who contribute to the

RRA fund will be the predominant beneficiaries of the RRA Fund. Future contributions to the corpus are primarily a function of percentages of growing nominal dollars, and the corpus will be invested and generate modest income, and as a result future payouts could reasonably be expected to hold value in real terms, although this is not a requirement of the payout structure. The longer RRA arrangements exist, however, the more accurate the premium estimates and negotiations may become, which would reasonably result in reduced RRA receipts in the future until a vendor / client risk equilibrium is met. Perpetual Fund Logic: A perpetual fund concept will allow for a more even distribution and may mitigate the impact of premium volatility. High Payout Rate Logic: A higher payout rate (25%) will allow quicker payments to the groups that generally have paid for the RRA Funds, and that generally have a shorter life expectancy as compared to most endowments.

2 | P a g e

Fund Investment Management The RRA Fund will be managed in a relatively conservative nature for the following reasons:

1. Relatively Short Duration of the Liabilities

The average age of a retiree is approximately 70, with consequent average expected liability duration of approximately 17 years, and a limited ability to support financial market volatility.

2. Unknown Future Cash Inflows The size of future RRA contributions, and the likelihood that the RRA requirement will be accepted in future contracts, is unknown due to shifting cost trend lines and the shifting health insurance marketplace.

3. Unknown Recipient Population The implementation of the Affordable Care Act (ACA) as well as the advent of private exchanges may cause a change to the population of retirees who enroll in an ASRS health insurance plan and are therefore eligible for the RRA distribution.

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

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

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

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

Investment Benchmark: U.S. Gov’t/Credit Float Adjusted: 1-5 Year The RRA funds may be managed internally or externally, and may be commingled with other assets consistent with statutory requirements. The RRA funds will be accounted for as a separate fund. Distribution Method The RRA funds will be distributed (rebated) on an annual basis to members of Plans that contributed to the RRA account. Health insurance plans that contributed to the RRA account balance are referred to as “contributing plans”.

Only those members who are enrolled in a contributing plan during the month in which that year’s distribution process begins and were also enrolled in a contributing plan in December of the most recently completed plan year will receive distributions, thereby benefiting only those groups of members that contributed to the RRA account balance. The distribution benefit will typically occur once a year. Payout Methodology:

1. Twenty-Five percent (25%) of the corpus of the fund will be paid out each year unless no new RRA funds were generated, in which case the aggregate payout will be approximately equal to the previous year up to the total balance of the fund.

2. The funds will only be paid to members who are enrolled in a contributing plan.

3. A ‘contributing plan’ is an ASRS plan that provides medical benefits at a level and to a membership generally consistent with a plan that has contributed to the RRA account balance. There are currently three plans (Non-Medicare Choice, Medicare Advantage HMO and Medicare Senior Supplement) with nine different rate structures, all of which can contribute to the RRA account balance.

3 | P a g e

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

5. A participant must have been enrolled in a contributing plan in December of the most recently completed plan year for which a distribution is being paid and must be enrolled in a contributing plan when the distribution calculation process begins.

6. Distributions will be in dollar amounts.

7. Each distribution would be one-time and not perpetual.

8. Calculation Periods will be based upon calendar years (CYs), which is the basis for a plan year.

9. Distribution Periods will be based upon calendar years (CYs), which is the basis for a plan year.

10. The Distribution month will be determined by ASRS staff based upon the availability of data and logistics.

The attached appendix “Pro Forma Estimate of First-Year Distribution” provides a working example of the methodology. Note: Should the ASRS determine that it can offer more cost effective health insurance through the establishment of a self-funded program, RRA balances may be utilized to offset differentials between premiums charged & other revenues received, and the actual program cost. Authorizations Interpretations: The Director will be responsible for interpreting and implementing this policy. Amendments & Modifications: Amendments and modifications of this policy require Board approval.

Agenda Item #9





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. Martha Rozen, Chief of Administrative Services Mr. Russ Levine, Budget and Procurement Program Manager Ms. Kerry White, Assistant Chief Investment Officer DATE: October 13, 2017 RE: Agenda Item #9: Presentation, Discussion, and Appropriate Action Regarding ASRS Appropriated and Continuously Appropriated Budgets and Spending Plans Purpose To replace the August 25, 2017, Board of Trustees motion regarding the ASRS appropriated budget, continuously appropriated budget and administrative and investment spending plans for fiscal year (FY) 2019. This replacement motion is being recommended in order to clarify the understanding and the intent of the appropriated and the continuously appropriated spending plans. Recommendation Staff is requesting the Board replace the August Motion as follows:

August 25th Board Motion Move to approve an appropriated budget request for FY 2019 in the amount of $24,642,700, an administrative spending plan of $31,195,700, and an investment spending plan of $145,409,300, as well as any private markets performance incentives and other fees when identified and paid.

Proposed Replacement Motion Move 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. Background At the August 25, 2017, Board meeting, staff presented information relating to the FY 2019 appropriated budget request proposal and the FY 2019 administrative, as well as the investment spending plans for continuously appropriated funding. The presentation provided projected expenditures only, which will of course be different from the final figures.


In August, the Operations, Audit, and Legislative Committee (OALC), and subsequently a quorum of the Board, appropriately approved an amount for the FY 2019 appropriated budget request proposal, which includes funding for ASRS operational costs and the administration of the Long Term Disability (LTD) Program. The approved request was submitted to the Office of the Governor, as required by statute, on September 1, 2017. Ultimately, the amount appropriated to the ASRS – whether a higher or lower dollar total - will be determined by executive and legislative actions. With regard to the continuously appropriated expenditures or spending plans, in accordance with Board governance, the ASRS director is required to manage and monitor continuously appropriated expenditures as prescribed in A.R.S. § 38-721. These continuously appropriated expenditures include expenses related to the investment responsibilities and are incurred as deemed necessary to ensure the agency is able to meet its fiduciary duties. The director provides reports to the OALC and the Board as necessary or directed. In the current fiscal year, actual administrative and investment continuously appropriated expenditures are reported monthly and estimated annual expenses are reviewed and adjusted quarterly.

Agenda Item #10 Note: There are no materials for this

agenda item.

Agenda Item #11

Director’s Report: 11a - Operations

11b - Budget & Staffing

11d - Appeals 11e - Employers Reporting

Agenda Item #11a

Director’s Report Operations

Member Advisory Center: Phone

44 66 76 31 18 67 54 33 36 14 35 62Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Timeliness (average wait time in seconds)0

5,000

10,000

15,000

20,000

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

Volume comparison of calls by month and year

Oct16-Sep17 = 177,083 ( 3.3% )

Oct15-Sep16 = 171,431

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Timeliness percent answered in 20 seconds or less

Rolling Year Avg. = 75%Objective

90%

91%

92%

93%

94%

95%

96%

97%

98%

99%

100%


Resolution Rate percent answered on first contact

Rolling year avg 99%

0%

2%

4%

6%

8%

10%

12%

14%


Abandonment Rate percent of calls abandoned

Rolling Year Avg. = 3.1%Objective

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Quality of agent response to member inquiries

Rolling Year Avg. = 96.9%91%

8%

1% 0%

Overall Satisfaction 2Q CY2017

Very SatisfiedSatisfiedDissatisfiedVery Dissatisfied

98.3% satisfied

1

Member Secure Messages (MSM)

3.0 3.0 5.0 6.0 2.0 1.8 2.5 2.1 2.5 3.2 2.5 1.7 23% 19% 15% 19% 50% 53% 14% 17% 12% 10% 22% 72%

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

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

0

250

500

750

1,000

1,250

1,500

1,750

2,000


Volume comparison of secure messages received by month and year

Oct16-Sep17= 16,802 ( 18.9% )Oct15-Sep16 = 14,127

0 50 100 150 200 250

Service Purchase

Account Inquiries

Pension

Refund

New Retiree

Number of messages

Reason for Contact top reasons -Sep 2017

55% 36%

6% 1% 1% 1%

Overall Satisfaction 2Q CY2017

Very SatisfiedSatisfiedSomewhat SatisfiedSomewhat DissatisfiedDissatisfiedVery Dissatisfied

99.3% satisfied

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Timeliness percent of secure messages responded to within 1 business day

Oct16-Sep17= 29% ( -65.3% )

Oct15-Sep16 = 83%

2

One-on-One Counseling

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

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

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

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

Health Insurance 9 7 5 7 3 4 7 4 6 5 4 7

LTD Vendor 0 0 0 0 0 0 0 0 0 0 0 0

Timeliness (average wait time in minutes)

50%

60%

70%

80%

90%

100%


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

Strategic Plan ObjectiveAppointments Rolling Year Avg. = 98.25%Walk-ins Rolling Year Avg. = 97.65%Reception/MAC Express Rolling Year Avg. = 99.77%Health Insurance Rolling Year Avg. = 88.71%

0 100 200 300 400

Survivor Benefits

Forms:Rqst/Sbmt,…

Retired:Issues/Updates

Health Insurance

New Retirement

Number of Visits

Reasons for Visit top five reasons - Sept 2017

0

500

1,000

1,500

2,000


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

LTD Vendor, HI Vendor and MAC Express Oct 16-Sept 17 ( 8,381 )Walk-ins Oct 16-Sept 17 ( 2,205 )Appointments Oct 16-Sept 17 ( 4,609 )Total Oct 15-Sept 16 = 16,265Total Oct 16-Sept 17 = 15,195 ( -7% )

79%

17%

3% 1% 0% 0% Overall Satisfaction

2nd Quarter 2017

Completely SatisfiedVery SatisfiedSatisfiedDissatisfiedVery DissatisfiedCompletely Dissatisfied

99% satisfied

3

Outreach Education and Benefit Estimates

0 0 0 1 0 1 0 0 0 0 0 0Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Benefit Estimate Timeliness (average TAT in days)

0

250

500

750

1,000

1,250

1,500

1,750

2,000


Total Meeting Attendees by type of meeting

Know Your Insurance Attendance Oct16-Sept17 = 2,914

Route 3 Webinar Attendance Oct16-Sept17= 348

Route 3 In-Person Attendance Oct16-Sept17 = 3,595

Route 4 Attendance Oct16-Sept17 = 2,447

Total Attendance Oct15-Sept16 = 8,718

Total Attendance Oct16-Sept17 = 9,304 ( 6% )

0

200

400

600

800

1,000

1,200

1,400

1,600


Benefit Estimate Volume comparison by month and year

Special Projects (Unrequested) Oct16-Sept17 = 2,425All Requested Oct16-Sept17 = 2,334Total Benefit Estimates Oct15-Sept16 = 8,785Total Benefit Estimates Oct16-Sept17 = 5,409 ( -62% )

60%

70%

80%

90%

100%


Benefit Estimate Timeliness percent completed within 3 business days

Strategic Plan ObjectiveRolling Year Avg. = 100%

Member Satisfaction

69%

28%

0% 0% 2% 1% Route 3 2nd Quarter 2017


97% satisfied

79%

21%

0% 0% 0% 0% Route 4 2nd Quarter 2017


100% satisfied

44% 48%

0% 0% 7% 1% Benefit Estimates

2nd Quarter 2017 Very SatisfiedSatisfiedSomewhat SatisfiedSomewhat DissatisfiedDissatisfiedVery Dissatisfied

92% satisfied

4

Service Purchase

2 2 3 3 1 1 2 1 1 2 1 1 3 5 5 7 7 4 4 5 4 3 3 4Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

1.2 1.3 1.4 1.4 1.4 1.4 1.5 2.0 2.5 2.5 2.2 2.2Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

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 Sept 30,

2017

Cost Invoices Pending

191

Payments Pending

21

0

250

500

750

1,000

1,250

1,500

1,750


Total Volume comparison by month and year

PDAs Processed Oct16-Sep17 = 34 ( -47% ) PDA Contracts Issued Oct16-Sep17 = 170 ( -38% )

Lump Sum Payments Oct16-Sep17 = 1,477 ( -25% ) Invoices Oct16-Sep17= 2,536 ( 7% )

Requests Oct16-Sep17 = 4,093 ( 23% ) Total Workload Aug15-July16 = 7,923

Total Workload Aug16-July17 = 8,017 ( 1% )

40%

50%

60%

70%

80%

90%

100%


Lump Sum Timeliness percent within 10 business days


40%

50%

60%

70%

80%

90%

100%


Cost Invoices Timeliness percent within 15 business days


30%

40%

50%

60%

70%

80%

90%

100%


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


95%

96%

97%

98%

99%

100%

July-Dec Jan-June

Cost Invoice Quality Rating FY 2017

Strategic Plan ObjectiveFY 2017

54%

25%

14%

7%

0% 0% Overall Satisfaction 2nd Quarter 2017


93% satisfied

5

Refunds

1 1 1 1 1 1 2 1 1 1 1 1Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sep

Timeliness (average turnaround time in business days)

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250


Volume comparison by month and year

Requests Oct16-Sept17 = 12,805 ( -5% )

Requests Oct15-Sept16 = 13,433

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%


Timeliness percent disbursed in 10 business days


0

20

40

60

80

100

120

140

160

180


Requests Pending

Rolling Year

95%

96%

97%

98%

99%

100%

July - Dec Jan - June

Refund Quality Rating FY 2017

FY 17 65%

22%

3% 2%

2%

6%

Overall Satisfaction 2nd Quarter 2017


90% 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%

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

7 18 12 13 22 26 22 8 12 11 13 12


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


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

First Payment Timeliness (average turnaround time in days)

Adjustments Timeliness (average turnaround time in days)

0

200

400

600

800

1000

1200

1400

1600

1800


First Payment Volume comparison by month and year

Oct16-Sept17 = 9,253 ( 3% )Oct15-Sept16 = 8,962

50%

60%

70%

80%

90%

100%


First Payment Timeliness percent disbursed in 10 business days

Rolling Year Avg. = 72%

125,000

130,000

135,000

140,000

145,000


Pension Volume comparison by month and year

Oct16-Sept17 = 1,693,487 ( 4% )Oct15-Sept16 = 1,628,356

0

200

400

600

800

1000

1200


Audits & Adjustments comparison by month and year

Adjustments Rolling Year = 462Audits Rolling Year = 7,726

50%

60%

70%

80%

90%

100%


Adjustments Timeliness Percent completed in 20 business days


63%

29%

4% 1% 1%

2%



96% satisfied

7

Survivor Benefits

Non Retired3 4 4 3 4 3 3 3 3 3 5 4

Retired2 2 2 1 2 1 2 2 1 1 1 1


Lump Sum (Non-Retired)7 5 6 4 4 4 3 3 3 5 4 3

Annuity (Retired and Non-Retired)4 5 5 4 3 2 2 3 2 3 2 2


Packet Timeliness (average TAT in days)

Payment Timeliness (average TAT in days)

0

100

200

300

400

500

600

700

800


Volume number of death notifications received

Non-Retired Oct16-Sept17 = 1,117 ( -56% )Retired Oct16-Sept17 = 3,079 ( 16% )Total Oct15-Sept16 = 4,345Total Oct16-Sept17 = 4,196 ( -4% )

0

100

200

300

400

500


Packet Volume number of beneficiary packets

Non-Retired Oct16-Sept17 = 1,042 ( -6% )Retired Oct16-Sept17 = 3,082 ( 4% )Total Oct15-Sept16 = 4,044Total Oct16-Sept17 = 4,144 ( 2% )

0

50

100

150

200

250


Payment Volume number of beneficiary payments

Lump Sum Oct16-Sept17 = 1,071 ( 14% )Annuity Oct16-Sept17= 800 ( 7% )Total Oct15-Sept16 = 1,663Total Oct16-Sept17 = 1,798 ( 8% )

20%

30%

40%

50%

60%

70%

80%

90%

100%


Packet Timeliness percent mailed in 15 business days or less

Strategic Plan ObjectiveNon-Retired Oct16-Sept17 = 94%Retired Oct16-Sept17 = 100%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%


Payment Timeliness percent paid in 10 business days or less

Strategic Plan Objective

Lump Sum Oct16-Sept17 = 92%

73%

21%

0% 0% 2% 4%



94% satisfied

8

Public Website: www.azasrs.gov

1

Followers: 2342 (+1%)

Followers: 448 (+1%)

91%

9%

92%

8%

82%

18%

82%

11% 6%

79%

14%

7%

76%

18%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Deskto

p - 20

12

Mo

bile - 20

12

Deskto

p - 20

13

Mo

bile -2

01

3

Deskto

p - 20

14

Mo

bile -2

01

4

Deskto

p - 20

15

Mo

bile -2

01

5

Tablet - 2

015

Deskto

p - 20

16

Mo

bile -2

01

6

Tablet - 2

016

Deskto

p - 20

17

Mo

bile -2

01

7

Tablet - 2

017

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

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


Volume comparison of public website visits by month and year

Oct16-Sep17 = 1,128,850 (2%)Oct15-Sep16 = 1,104,355

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

Retirement

Benefit Payments

Health-care

Retirement Central

Estimate your benefits

Number of Visits

Most Visited Public Pages top five page visits Sept 17

Social Media Sept 17

0

1

2

3

4

5

6

7

8

9

10

FY20

15

FY2

016

FY2

017

Secure

Public

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

3m 33s 3m 50s

3m 13s

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

9

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

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

Secure Website: secure.azasrs.gov

This

month

12mo

Min

12mo

Max

12mo

Avg

Objecti

ve

HI 82% 35% 86% 66% 80%

En

roll

95% 87% 98% 92% 99%

Re

f

80% 79% 92% 84% 90%

Re

t67% 67% 81% 76% 90%

Ad

d

67% 73% 87% 78% 75%

Be

ne

83% 83% 88% 85% 75%

Ta

x

75% 69% 88% 80% 75%

DD 49% 37% 65% 54% 75%

Historical Comparisonof Online Usage

Total online

78%

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

Banking

Taxes

Beneficiaries

Address

Retire

Refund

Enrollment

Health Ins

Self Service Transactions Sep 2017

Online = 8,616Manual = 2,456Smart Forms

0%20%40%60%80%

100%

Active Inactive Alt Payees Retired Total

Email Addresses by member type

Jan 2017

0

20,000

40,000

60,000

80,000

100,000

120,000


Volume comparison of secure website visits by month and year

Oct16-Sep17 = 1,160,817 (-.05%)Oct15-Sep16 = 1,161,347

Refund

MemberStatement

Beneficiary

AccountInformation

Benefit Estimator

Number of Visits

Most Visited Secure Views Sept 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 #11b

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 +

Project Continuous

Appropriations = Administrative Budget Total

Personal Services (PS)Salaries and wages 3,221,200 110,400 3,331,600 152,500 94,400 3,578,500 Variable Compensation Strategies Plan - - - Investment Incentive Compensation Plan - - -

Total PS 3,221,200 - 110,400 3,331,600 152,500 94,400 3,578,500 Employee Related Expenses (ERE)Employer costs - benefits, taxes, charges 1,289,900 36,600 1,326,500 43,900 35,800 1,406,200

Total ERE 1,289,900 - 36,600 1,326,500 43,900 35,800 1,406,200 Professional and Outside Services (P&O)LTD Program administration 298,400 298,400 298,400 Pension payroll disbursement processing 9,200 9,200 9,200 IT Software Development 193,400 50,000 243,400 68,800 24,800 337,000 Actuarial and benefit consulting services 33,700 33,700 33,700 IT security professional services 37,400 200 37,600 37,600 Legal fees 149,100 149,100 - 149,100 Other outside services 8,200 4,100 12,300 12,300

Total P&O 388,100 298,400 97,200 783,700 68,800 24,800 877,300 TravelIn-state 4,200 4,200 4,200 Out-of-state 2,600 2,600 2,600

Total Travel 6,800 - - 6,800 - - 6,800 Other Operating ExpendituresOffice rent 352,900 352,900 352,900 Software licenses and support 111,700 111,700 111,700 Telecommunications 22,600 22,600 22,600 Risk management insurance premiums 150,600 150,600 150,600 Dues, subscriptions, publications 9,500 30,500 40,000 40,000 Postage and delivery 28,700 2,300 31,000 31,000 Education, training and conferences 3,600 3,600 3,600 Equipment repair and maintenance 1,400 1,400 1,400 Other operating supplies 20,200 20,200 20,200 External printing and mailing newsletters 200 200 200

Total Other Operating Expenditures 348,500 - 385,700 734,200 - - 734,200 EquipmentFurniture purchases/replacement 100 100 100 Network, server, PC and devices 7,700 7,700 - 7,700

Total Equipment 7,800 - - 7,800 - - 7,800 TOTAL 5,262,300$ 298,400$ 629,900$ 6,190,600$ 265,200$ 155,000$ 6,610,800$

APPROPRIATED / BUDGETED AMOUNTS 22,667,700$ 2,500,000$ 4,675,100$ 29,842,800$ 1,514,600$ 882,900$ 32,240,300$

% EXPENDED YTD 23.2% 11.9% 13.5% 20.7% 17.5% 17.6% 20.5%% OF FISCAL YEAR ELAPSED 25.0%

Administrative Projects BudgetBase Administrative BudgetFY 2018 ASRS Budget ReportAdministrative Expenses(Expenditures to Date as of September 30, 2017)

FY 2018 Budget Report Page 1

FY 2018 ASRS Budget ReportInvestment Expenses EXPENDED YTD

(as of September 30, 2017)

ESTIMATEDEXPENSES

(as of October 2017)

ESTIMATED EXPENSES

AS % OF TOTAL AUM

ESTIMATEDEXPENSES PER MEMBER

Investment Management ExpensesInternal Investment Management

Salaries and benefits 382,800$ 1,360,600$ Investment Incentive Compensation Plan (ICP)* -$ 254,500$ Travel, education and training, rent, and other operational expenses 37,400$ 323,000$

Public MarketsExternal investment management fees -$ 58,665,600$ Transactional and other fees 334,900$ 4,000,000$

Private MarketsPrivate and opportunistic equity management fees 12,638,400$ 50,657,000$ Private and opportunistic equity performance incentive and other fees** 13,143,000$ 13,143,000$

Real estate, farmland and infrastructure management fees 2,005,700$ 8,644,500$ Real estate, farmland and infrastructure performance incentive and other fees** 2,408,500$ 2,408,500$

Private and opportunistic debt management fees 1,923,400$ 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 187,500$ 2,900,000$ Investment Management Expenses Subtotal 34,989,200$ 160,670,300$ 0.43% 274.04$

Investment Related Consulting, Legal and Information Services ExpensesInvestment Consulting Services 203,500$ 3,972,100$ Investment Related Legal Services 88,600$ 1,845,000$ Investment Electronic Information Services 184,300$ 2,668,400$ External Financial Consulting Services -$ 113,500$

Services Expenses Subtotal 476,400$ 8,599,000$ 0.02% 14.67$ Total Investment Expenses 35,465,600$ 169,269,300$ 0.45% 288.71$

FY 2018 ASRS Budget ReportTotal Administrative and Investment Expenses

EXPENDED YTD(as of September 30, 2017)

ESTIMATEDEXPENSES

(as of October 2017)

ESTIMATED EXPENSES

AS % OF TOTAL AUM

ESTIMATEDEXPENSES PER MEMBER

Administrative Expenses (from Page 1 excluding ICP)* 6,610,800$ 31,985,800$ 0.09% 54.55$ Investment Expenses (including ICP)* 35,465,600$ 169,269,300$ 0.45% 288.71$

Total Expenses 42,076,400$ 201,255,100$ 0.54% 343.26$ ASRS Estimated Total Market Value of Assets Under Management (AUM) as of June 30, 2017 37,413,016,000$

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

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


Fiscal Year 2018 Budget Report Summary

The Arizona State Retirement System (ASRS) administrative and investment costs are expended in accordance with Arizona Revised Statutes (A.R.S.). The ASRS utilizes both appropriated and continuously appropriated funds. Column amounts represent the expenditures in each category to date. Information on the total appropriated and estimated planned annual expenses are also included as a guide to the rate of spend during the fiscal year. Expenditures to date include seven (7) pay periods (27% of the annual payrolls) in FY 2018. Appropriations Columns labeled as appropriations represent funds that have been approved by the Legislature and the ASRS Board for fiscal year July 1, 2017 through June 30, 2018, and include:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


1

Arizona State Retirement System Staffing Report

(September 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 1.0

8.0 36.36%

Administrative Services Division (ASD) 14 0.0

0.0 0.25

1.79% Financial Services (FSD) 80 0.0

0.0 9.75

12.19%

Technology Services (TSD) 52 0.0

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) 65 0.0

1.0 7.50 11.54%

252 0.00 3.00 35.5 14.09%

Turnover September

2017 New Hires

September 2017 Exits

Total Exits (Last 12 Months)

Annualized Turnover %

0.0 3.0 27.00 11.82%

Turnover benchmarks: Arizona State Personnel System 2016: 18.8% 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.

• Three positions are under recruitment: IMD Investment Projects Analyst and TSD Technical Leads (2) • Three positions has been filled with a future start dates: MSD Retirement Advisors (2) (start date: 10/21/2017) and TSD Network Specialist

II (start date: 10/30/2017) • One position is scheduled for recruitment in October 2017: 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 September 2017 strategic objectives were not met. Seven positions are vacant. Greater than normal risk is expected to remain until positions are filled and fully trained.

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

MSD E-mail and Written Correspondence

MSD Phoenix: Appointments/Walk-ins/Outreach

MSD Tucson: Appointments/Walk-ins/Outreach

MSD Benefit Estimates

MSD Employer Relations

MSD Health Insurance/LTD Benefits Administration and Communication

FSD Service Purchase Processing

FSD Monthly Pension Payroll Processing

FSD New Retiree Processing


3


Impact Comments


FSD Survivor Benefit Processing

FSD Records Management (data processing/imaging)

FSD Mailroom and Printing

FSD LTD/Health Benefit Supplement Processing

FSD Transfer Processing

FSD General Accounting

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 overwhelmed the team. In September, we filled another vacant position but the resource will not start until the end of October. 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 September 2017 was 46 (33 FTEs and 13 external resources).


4


Impact Comments


IMD Investment Management

DIR Board/Executive Staff Support

DIR Information Security

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

DIR Strategic Planning/Analysis

DIR Strategic Communications

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

DIR Public Affairs

DIR Rule Writing

DIR Legislative Relations

DIR Defined Contributions Plans

IA Internal Audit


5


Impact Comments


ASD Human Resources

ASD Training and Development

ASD Contracts and Procurement

ASD Facilities Management

ASD Budget Administration

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

Date Purpose Location Attendee Cost

July 24 - 25, 2017 Government Risk Management Summit Washington, DC Lisa King $962.03July 24 - 25, 2017 Government Risk Management Summit Washington, DC Dave King $1,426.16July 26-28, 2017 CIM and Pierce/PEP Annual Meetings Los Angeles, CA Erick Glass $381.46July 26-28, 2017 CIM and Pierce/PEP Annual Meetings Los Angeles, CA Micheal Copeland $438.51August 5-9, 2017 NASRA Baltimore, MD Dave Cannella $2,380.00September 9-13, 2017 67th Annual NCSSSA Conference Charleston, WV Michele Briggs $462.60September 11-16, 2017 LCM Partners Anuual Summit and Due Diligence London, UK Al Alaimo $1,381.97September 12-14, 2017 Atlassian Summit U.S. 2017 San Jose, CA Aaron Chandler $1,485.88September 19-20, 2017 Attend Annual Meetings and due diligence San Francisco Erick Glass $361.04

Total: $9,279.65

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

Agenda Item #11c

Director’s Report Cash Flow Statement

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

Fiscal FiscalRetirement Retirement Health Benefit Long-Term 2018 2017

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

ADDITIONSContributions

Member contributions 99,462,712$ 534$ -$ 1,403,883$ 100,867,128$ 246,352,123$ 248,028,793$ Employer contributions 95,613,224 534 3,859,556 1,403,891 100,877,204 244,235,084 247,952,681 Alternative contributions (ACR) 2,452,425 - 26,433 34,438 2,513,296 5,609,344 5,510,461 Transfers from other plans 83,386 - - - 83,386 165,931 4,434 Purchased service 1,091,140 - - - 1,091,140 5,426,359 5,715,827

TOTAL CONTRIBUTIONS 198,702,886 1,067 3,885,988 2,842,212 205,432,154 501,788,840 507,212,195

DEDUCTIONS* Investment management fees 2,486,075 - - 44,966 2,531,041 15,637,003 13,467,196 Custody fees - - - - - - - Consultant and legal fees 132,762 - - - 132,762 296,816 447,533 Internal investment activity expense 65,835 - - - 65,835 116,351 744,957 Retirement and disability benefits 249,013,591 3,080,168 8,258,256 5,222,149 265,574,164 793,464,671 768,527,184 Survivor benefits 3,814,863 503 - - 3,815,366 12,400,788 8,962,715 Refunds to withdrawing members, including interest 19,932,757 - - - 19,932,757 75,142,476 75,748,677 Administrative expenses 1,779,487 - - 143,661 1,923,148 7,855,168 9,377,798 Transfers to other plans 58,885 - - - 58,885 223,478 98,677 Other - - - - - 50,303 63 TOTAL DEDUCTIONS 277,284,254 3,080,670 8,258,256 5,410,776 294,033,957 905,187,055 877,374,798

INCREASE (DECREASE) (78,581,369) (3,079,603) (4,372,268) (2,568,564) (88,601,804) (403,398,215) (370,162,603)

From securities lending activities:Security loan program 429,658 - - - 429,658 1,289,595 1,160,507 Security loan interest expense / (Rebate) (388) - - - (388) 105,669 (400,899)

** Net income from securities lending activities 430,046 - - - 430,046 1,183,927 1,561,406

*** Capital Calls / (Distributions)Farmland and Timber - - - - - - - Infrastructure - - - - - (14,261,548) - Opportunistic Debt 100,734,344 764,349 4,406,606 506,919 106,412,218 124,036,463 129,965,945 Opportunistic Equity 1,218,505 9,338 53,295 6,211 1,287,349 (12,599,725) (35,528,196) Private Debt 63,001,783 475,638 2,745,018 316,262 66,538,701 252,637,418 185,604,203 Private Equity 14,419,501 109,416 630,590 73,040 15,232,546 (21,970,403) (32,921,572) Real Estate 6,818,565 51,691 298,195 34,797 7,203,249 (20,124,115) (233,741,018) Owned Real Estate - - - - - - -

TOTAL Capital Calls 186,192,697 1,410,433 8,133,704 937,230 196,674,063 307,718,090 13,379,361

NET INCREASE (DECREASE) (264,344,019)$ (4,490,036)$ (12,505,972)$ (3,505,794)$ (284,845,820)$ (709,932,378)$ (381,980,559)$

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

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

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

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

Fiscal FiscalRetirement Retirement Health Benefit Long-Term 2018 2017

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

ADDITIONSContributions

Member contributions 82,878,977$ 534$ -$ 1,170,360$ 84,049,870$ 145,490,309$ 146,330,357$ Employer contributions 77,340,362 534 3,218,210.03 1,170,358 81,729,464 143,352,215 148,509,139 Alternative contributions (ACR) 1,755,658 - 19,030 24,623 1,799,311 3,096,048 3,074,920 Transfers from other plans - - - - - 82,545 4,434 Purchased service 2,259,590 - - - 2,259,590 4,335,570 3,864,939

TOTAL CONTRIBUTIONS 164,234,587 1,067 3,237,240 2,365,341 169,838,235 296,356,687 301,783,789

DEDUCTIONS* Investment management fees 12,451,963 - - - 12,451,963 13,105,962 13,467,196 Custody fees - - - - - - - Consultant and legal fees 126,810 - - - 126,810 127,967 146,189 Internal investment activity expense 175,462 - - - 175,462 420,299 572,368 Retirement and disability benefits 250,398,649 3,097,786 8,230,832 5,103,343 266,830,609 529,474,933 515,593,378 Survivor benefits 5,302,874 29,579 - - 5,332,453 8,559,717 7,016,541 Refunds to withdrawing members, including interest 26,083,480 10,629 - - 26,094,109 55,207,706 55,149,152 Administrative expenses 2,433,619 - - 139,980 2,573,600 6,552,424 6,984,725 Transfers to other plans 19,957 - - - 19,957 164,593 94,370 Other - - - - - 9 54 TOTAL DEDUCTIONS 296,992,814 3,137,994 8,230,832 5,243,323 313,604,963 613,613,610 599,023,973

INCREASE (DECREASE) (132,758,227) (3,136,927) (4,993,592) (2,877,982) (143,766,728) (317,256,923) (297,240,184)

From securities lending activities:Security loan program 402,311 - - - 402,311 859,937 795,802 Security loan interest expense / (Rebate) 71,379 - - - 71,379 106,057 (224,730)

** Net income from securities lending activities 330,933 - - - 330,933 753,880 1,020,532

*** Capital Calls / (Distributions)Farmland and Timber - - - - - - - Infrastructure (13,496,277) (103,315) (593,397) (68,559) (14,261,548) (14,261,548) - Opportunistic Debt 13,238,356 101,449 582,202 67,251 13,989,258 17,624,245 74,320,755 Opportunistic Equity (8,469,024) (64,918) (372,451) (43,181) (8,949,574) (13,887,074) (21,676,878) Private Debt 146,381,289 1,121,585 6,436,631 745,597 154,685,102 186,098,717 158,973,411 Private Equity (29,380,884) (225,227) (1,292,188) (148,357) (31,046,655) (37,202,949) 8,338,049 Real Estate 12,814,872 98,199 563,658 65,135 13,541,864 (27,327,364) (134,854,011) Owned Real Estate - - - - - - -

TOTAL Capital Calls 121,088,332 927,773 5,324,454 617,886 127,958,445 111,044,026 85,101,326

NET INCREASE (DECREASE) (253,515,627)$ (4,064,699)$ (10,318,046)$ (3,495,868)$ (271,394,241)$ (427,547,070)$ (381,320,977)$

* 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 #11d

Director’s Report Appeals

OUTSTANDING ASRS APPEALS

Information as of October 11, 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. Hillis petitioned Arizona Supreme Court on 6/2/17.

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.

4/17/2017 Matthew Long Appellant is requesting 25 years of service be used in his retirement calculation.

ALJ decision received on 7/20/2017 upholding ASRS decision. ASRS Board Appeals Committee accepted the ALJ Decision on 9/12/2017 upholding the agency action.

5/25/2017 Druh Deschene Appellant is requesting to cancel refund request in favor of retirement.

ALJ decision received on 7/24/2017 upholding ASRS decision. ASRS Board Appeals Committee accepted the ALJ Decision on 9/12/2017 upholding the agency action.

OUTSTANDING ASRS APPEALS

Information as of October 11, 2017. Updates are noted in bold font.

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. Scheduled to be heard at 11/14/2017 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 due by 10/17/2017.

9/13/2017 Steven Auld Appellant is requesting different calculation method be used for pension.

OAH hearing scheduled 10/25/2017, but the hearing was cancelled at member’s request due to member’s satisfaction with his final audited ASRS retirement benefit.

9/15/2017 Susan Thompson Appellant is appealing denial of LTD medical eligibility. OAH hearing scheduled for 11/13/2017.

Agenda Item #11e

Director’s Report Employers Reporting


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

ARIZONA STATE RETIREMENT SYSTEM Paul Matson

Director

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

DATE: October 13, 2017 RE: Delinquent Employers As of October 13, 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:

MARANA DOMESTIC WATER IMPROVEMENT 5,700 * DESTINY SCHOOL 21,000 * SEQUOIA PATHWAY ACADEMY+ 30,000 * AMERICAN HERITAGE ACADEMY+ 15,000 * SEQUOIA CHOICE SCHOOL+ 22,000 * SEQUOIA VILLAGE SCHOOL+ 17,000 * SEQUOIA CHARTER SCHOOL+ 64,500 * PATHFINDER ACADEMY+ 22,000 * SEQUOIA RANCH SCHOOL+ 9,000 * SEQUOIA SCHOOL FOR THE DEAF AND HARD OF HEARING+ 10,000 * REDWOOD ELEMENTARY ACADEMY+ 7,000 * AZ CONSERVATORY FOR ARTS & ACADEMICS+ 13,700 * $236,900 * GRAND CANYON PREP 216,000++ LUZ ACADEMY 18,600+++ STARSHINE ACADEMY 67,500+++ $302,100 Total $539,000 *

*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

Arizona State Retirement System

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