Fiscal Note
BILL # HB 2329 TITLE: procurement; director; technical correction
NOW: CORP; employee enrollment; membership; election
SPONSOR: Payne STATUS: As Amended by House MAPS
PREPARED BY: Gordon Robertson
Description
The bill would allow Corrections Officer Retirement Plan (CORP) members hired on or after July 1, 2025 to make a one-
time election to participate in either the CORP defined benefit plan ("CORP DB Plan") or the Public Safety Personnel
Retirement System Defined Contribution Retirement Plan ("PSPRS DC Plan"). In addition, the bill would allow CORP
members hired between July 1, 2018 and the general effective date of the bill (who by default are in the PSPRS DC Plan)
to make a one-time election to participate in the CORP DB Plan. The bill would also require the PSPRS Board of Trustees to
provide education and information about the CORP DB Plan and the PSPRS DC Plan to CORP members hired on or after
July 1, 2025 within their first 60 days of employment.
Estimated Impact
We estimate the bill will generate General Fund savings of up to $(1.8) million in FY 2025 based on a lower employer
contribution rate in the CORP DB Plan relative to PSPRS DC Plan. This impact, however, only represents the short-term
fiscal impact of the proposal by comparing the fixed PSPRS DC Plan employer contribution rate to the startup employer
contribution rate of the CORP DB Plan as it opens to this new class of employees with no unfunded liability.
Over the long-term, if the CORP DB Plan for this class of employees generates unfunded liability, the employer
contribution rate would likely increase above the PSPRS DC Plan employer contribution rate, generating increased costs to
the state. The future change in the employer contribution rate would depend on a number of actuarial assumptions that
we cannot estimate in advance.
We have not attempted to assess whether the bill would change the retention rate of CORP employees and any
corresponding fiscal impact.
In addition, there will be additional administrative workload for PSPRS Staff associated with opening the CORP DB Plan to
this new class of employees and providing the required educational materials to those employees. The actual cost of
these changes would depend on the workload required to adjust the PSPRS Board of Trustees administrative systems and
the specific materials used to comply with the bill's education and plan information requirements.
PSPRS staff estimates that alterations to the PSPRS administrative IT system to accommodate the additional retirement
options available to members would cost between $1.5 million and $2.5 million in one-time IT expenses.
Analysis
Benefit/Plan Changes
Under current law, except for probation and surveillance officers employed by the Administrative Office of the Courts
(AOC), all CORP members hired after July 1, 2018 (generally known as "Tier 3" members) are automatically enrolled in
PSPRS DC Plan.
(Continued) - 2 -
Tier 3 AOC probation and surveillance officers are given the option to enroll in either the PSPRS DC Plan or the CORP DB
Plan, with a selection required within 90 days; otherwise, the employee defaults to the defined benefit plan. The Tier 3
CORP DB Plan currently available to these AOC employees is a benefit structure specific to employees hired after July 1,
2018.
The bill would allow CORP members hired on or after July 1, 2025 to make a one-time election to participate in either:
1) the Tier 3 CORP DB Plan (same as currently only available to probation and surveillance officers); or 2) the PSPRS DC
Plan. Under the bill, if the new employee does not make a selection within 90 days of employment, the employee defaults
to the Tier 3 CORP DB Plan. In addition, the bill would allow existing non-probation/surveillance officer Tier 3 CORP
members hired between July 1, 2018 and the general effective date of the bill to make a one-time election to participate
in the CORP DB Plan.
Fiscal Impact – Normal Cost
The CORP employer contribution rate has 2 components. The first component is the normal cost, which is the immediate
cost associated with the benefit being earned. The second component is the unfunded liability, which represents prior
benefits earned by members that are unfunded due to changes in the plan's actuarial performance or assumptions.
The bill would create an entirely new class of defined benefit members – for example, there would now be Tier 3
employees at the Arizona Department of Corrections enrolled in a defined benefit plan. Because of this, in the short-term
the employer costs would only relate to the normal cost, as there would not have been time for any unfunded liabilities to
develop due to missed actuarial assumptions (for example, lower than expected investment returns).
The employer contribution rate for the CORP Tier 3 DB Plan is based on 33.33% (one-third) of the normal cost of the
member's pension and health benefits. Based on actuarial data provided by PSPRS, we estimate that the total (employee
+ employer) normal cost of the CORP Tier 3 DB Plan newly available to members would be approximately 14%. The
employer share of this cost would be 4.67% (14.0% X 33.33%).
Under the PSPRS DC Plan, the employer contribution rate includes a base 5% rate deposited into the member's
retirement account as well as 50% of the normal cost associated with the member's health and disability benefits
(currently 0.67% combined). Therefore the current employer contribution rate for the PSPRS DC Plan is 5.67%.
Comparing the 4.67% CORP DB Plan employer contribution rate to the 5.67% PSPRS DC Plan employer contribution rate
results in a (1.00%) decrease in the employer contribution rate for CORP Tier 3 members.
The total FY 2025 Tier 3 salary base for state CORP employers is approximately $177 million. If applied against this entire
salary base, the (1.00%) difference in contribution rates would generate up to $(1.8) million in savings in FY 2025 (see
Table 1). Given the very small magnitude of non-General Fund sources used for these costs, for the purposes of this
analysis these savings amounts are assumed to accrue entirely to the General Fund.
The actual short-term General Fund impact would depend on the actual proportion of employees who elected to
participate in the CORP DB Plan instead of remaining in the PSPRS DC Plan. For comparison purposes, as a percentage of
payroll, the AOC Probation/Surveillance Officer employer group (with the current DB/DC option) has approximately 61%
of employees enrolled in the CORP DB Plan.
(Continued) Table 1
FY 2025
Salary Base
(1%) Change in
FY 25 Cost
Corrections Officer - ADC166,088,400$ (1,660,900)$
Corrections Officer - DJC10,388,100$ (103,900)$
Detention Officer - DPS 353,700$ (3,500)$
Total 176,830,200$ (1,768,300)$
HB 2329 - Change in Tier 3 Agency Normal Costs - 3 -
The employee contribution rate for the CORP Tier 3 DB Plan is based on the remaining 66.67% (two-thirds) of the normal
cost of the member's pension and health benefits. We estimate that the required employee contribution rate for the
CORP Tier 3 DB Plan newly available to members would be 9.33% (14.0% X 66.67%).
Under the PSPRS DC Plan, members may choose retirement account contributions of anywhere from 5% up to the
maximum limit established by the federal IRS, with a default rate of 7%. In addition, the employee is required to pay 50%
of the normal cost associated with the member's health and disability benefits (currently 0.67% combined). Assuming this
default 7% base contribution rate, along with the 0.67% for health/disability benefits, the current employee contribution
rate for the PSPRS DC Plan is 7.67%.
Fiscal Impact – Unfunded Liability Cost
In the short-term, the bill is not expected to have an additional fiscal impact due to unfunded pension liabilities. This is
based on 2 separate issues:
• "Legacy" Tier 1/Tier 2 Pension Liabilities – Under the state's recent pension reforms (for both PSPRS and CORP),
unfunded pension liability payments for the now closed Tier 1 and Tier 2 plans are paid by the employer on the
entire payroll base. Under that process, the plan actuaries calculate a percentage rate to assess for Tier 1/2
unfunded liabilities. That same percentage rate is then added to the employer normal cost for Tier 1/2 defined
benefits employees and also added to the employer normal cost for Tier 3 defined contribution employees.
Therefore, the bill allowing for the shift of Tier 3 PSPRS DC Plan employees over to the Tier 3 CORP DB Plan will
not impact any payments for closed employee tiers, as the same percentage rate would be assessed regardless
of plan choice.
• Tier 3 Unfunded Pension Liabilities – As noted above, in the short-term the newly added Tier 3 CORP DB Plan
employees would have no unfunded pension liability associated with them.
Over the long-term, if the CORP DB Plan for this class of employees generates unfunded liability, the state's cost under the
bill would increase. Under the Tier 3 CORP DB Plan's structure, any unfunded liability associated with Tier 3 employees is
shared 50/50 between the employee/employer. Therefore, if the bill generates Tier 3 unfunded liabilities for these
employees, it is likely that the 4.67% employer normal cost plus the 50% employer share of unfunded liability will exceed
the 5.67% PSPRS DC Plan employer contribution rate. The future change in the CORP DB Plan employer contribution rate
would depend on a number of actuarial assumptions that we cannot estimate in advance.
Fiscal Impact – PSPRS Administrative Costs
PSPRS Staff estimates that administrative costs to implement the bill would be between $1.5 million and $2.5 million for
one-time IT development costs.
In addition, the bill requires the PSPRS Board of Trustees to provide employees hired after July 1, 2025 with "interactive,
objective educational training, counseling, and participant-specific plan information" about both the CORP DB Plan and
the PSPRS DC Plan. We estimate that this policy change required by the bill would generate additional workload for PSPRS
Staff related to providing the required educational materials for new employees. The actual cost of the retirement
education requirements would depend on the amount of time necessary to develop and disseminate the materials.
Local Government Impact
We estimate the bill would also generate short-term savings related to detention staff employed by each county and the
city of Avondale (the latter being the only city with a detention class). As with state agencies, all Tier 3 CORP detention
staff are automatically enrolled in the PSPRS DC Plan, so the same (1.00%) decrease in employer contribution rates
applies to each of these local employer groups. By multiplying this change in employer contribution rates against the total
local Tier 3 salary base, we estimate the bill would generate up to $(457,100) in local government savings in FY 2025
(see Table 2).
(Continued)
- 4 -
3/11/24
Table 2
FY 2025
Salary Base
(1%) Change in
FY 25 Cost
Apache County 608,000$ (6,100)$
Cochise County 889,300$ (8,900)$
Coconino County 1,696,600$ (17,000)$
Gila County 1,138,300$ (11,400)$
Graham County 1,259,500$ (12,600)$
La Paz County 444,700$ (4,400)$
Maricopa County 17,560,700$ (175,600)$
Mohave County 2,078,700$ (20,800)$
Navajo County 1,332,400$ (13,300)$
Pima County 8,517,600$ (85,200)$
Pinal County 1,989,700$ (19,900)$
Santa Cruz County 996,300$ (10,000)$
Yavapai County 4,006,800$ (40,100)$
Yuma County 3,123,200$ (31,200)$
City of Avondale 60,200$ (600)$
Total 45,702,000$ (457,100)$
HB 2329 - Change in Tier 3 Local Normal Costs