Pension Transparency: Arizona

Analysis of Arizona's policies

Teachers, policymakers and taxpayers deserve accurate and reliable information about the costs and benefits of the public pension systems they support.

Just as teachers can easily obtain their salary schedules, they should have access to information about pensions so that they can make informed decisions about their career and retirement futures. It is unclear what information, if any, Arizona provides to teachers about their retirement benefits. No evidence could be found on the retirement system's website that Arizona provides teachers with information on how their benefits accrue for each year of service, the amount contributed each year by teachers and employers on behalf of teachers, or the projected value of a teacher's contributions based on different assumptions about the rate of return expected (e.g. 4%, 6%, and 8%), nor that the state provides teachers with transparent information about the opportunity cost of leaving contributions in the system by reporting how much might be earned if teachers were to put contributions into a personal retirement savings account.

Teachers in Arizona enroll in a final-salary DB plan, which means that employee and employer contributions should be sufficient to pre-fund the employee's pension. As Arizona has a multi-tier pension system, contributions that exceed the normal cost may be used to fund other teachers' benefits (so-called legacy costs). There is no evidence, however, that Arizona provides teachers with clear information about how their contributions are being used, including the extent to which current employer contributions are being used to subsidize the retirement benefits of teachers under other tiers.

If Arizona does share any of this information with teachers, the fact that it does so is hidden from public view.

Public disclosures on teacher pensions in Arizona also lack transparency. Arizona does not report projections for future contributions required to fully amortize the system's total unfunded liabilities, information that would allow policymakers and employers to better plan their budgets in the short and longer terms. These projections should be reported under a range of assumptions about the rate of return on investments, not just under the system's own assumption, which would allow stakeholders in Arizona to appropriately assign risk to the system's obligations and provide clarity about potential unfunded liabilities facing taxpayers.

The Government Accountability Standards Board (GASB) requires public retirement systems to disclose who makes employer contributions, and the proportion of total contributions for which each contributor is responsible. All states' pension systems collect this information, and Arizona makes these data readily available.

Arizona, like most states, reports the portion of total pension contributions that is normal cost and the proportion that is amortization cost. However, the state does not report information about whether it has taken on debt in order to pay for current or future retiree benefits (e.g. through pension obligation bonds or other instruments for raising capital). Even if the state has not taken on debt, it should disclose this information to the public as it is an important indicator of the state's overall health and stability.

Citation

Arizona State Retirement System, Actuarial valuation Report as of June 30, 2015. Arizona State Retirement System, Schedules of Employer Allocations as of and for the year ended June 30, 2015.

Recommendations for Arizona

Provide teachers with the information necessary to understand their retirement benefits.
Arizona should provide much more detailed information to teachers about how their benefits accrue at different points during their careers, as well as information about the opportunity costs related to any contributions made into the system. Because the system has multiple tiers, the plan should also disclose to teachers how their contributions are being used (i.e. whether they all are directed at prefunding their own retirement, or whether a portion of their contributions are used to help pay for retirement benefits of other members). Moreover, Arizona could provide detailed information about how employer contributions are used - e.g. to what extent the employer contributions for an individual teacher are used to subsidize teachers in different tiers and teachers with different tenure. If Arizona does in fact share any of this information with teachers, it should share with policymakers and the public a template for the data that are provided.

Report to policymakers and the public data that give a complete representation of the system's financial health.
Arizona should also report projections for future contributions necessary to pay off its unfunded liabilities under a range of assumptions about its discount rate. Finally, the state should disclose in its reports whether or not the system has taken debt service to pay for retirement benefits.

State response to our analysis

Arizona did not respond to repeated requests to review this analysis.