Arizona State Retirement System—The ASRS Defined Benefit Plan Is Not Fully Funded, but Steps Have Been Taken to Improve Its Long-term Sustainability and Some Additional Actions Can Further Strengthen Its Financial Condition

The Arizona State Retirement System (ASRS) defined benefit plan (ASRS plan) is not fully funded, but steps have been taken to improve its long-term sustainability. The ASRS plan had over 550,000 members, including over 119,000 retirees, as of June 30, 2014. The ASRS plan’s ratio of assets to estimated pension obligations (i.e., its funded status) declined between June 30, 2005, and June 30, 2012, but had improved slightly as of June 30, 2014. The decline was partially the result of unmet investment return expectations. The ASRS and Legislature have taken several steps to improve the ASRS plan’s funded status and long-term sustainability by increasing contribution rates and, for recent ASRS plan members, raising eligibility requirements and eliminating permanent benefit increases. In line with best practices, the ASRS should continue with its plans to adopt a funding policy, which outlines how it will improve the ASRS plan’s funded status.  The ASRS should also develop a method to ensure that future benefit increases do not impact the ASRS plan’s sustainability. Finally, the ASRS should implement additional controls to minimize the impact of nonpromotional salary increases (i.e., pension spiking).